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aMERIC/un  lAW  relating 
INCOMF  AND  PRINCIPAL 


EDWIN  A.HOWES  jR, 


LAW 


47  Li. 


/ 


UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LffiRARY 


liBIIF,' 


'^Mi^UKW 


*mimm, 


Digitized  by  tlie  Internet  Arcliive 

in  2007  witli  funding  from 

IVIicrosoft  Corporation 


littp://www.arcliive.org/details/americanlawrelatOOIioweiala 


THE  AMERICAN  LAW 


RELATING    TO 


INCOME    AND    PRINCIPAL 


THE  AMERICAN  LAW 


RELATING  TO 


INCOME  AND  PRINCIPAL 


BY 
EDWIN  A.  HOWES,  Jr. 

A.B.,    LL.B.,    HARV. 
OF   THE   SUFFOLK  BAR 


BOSTON 
LITTLE,  BROWN,  AND   COMPANY 

1905 


T 


Copyright,  1905, 
Bt  Edwin  A.  Howes,  Jk. 

AU  rights  reserved 


SStl'i' 


THE    UNIVERSITY   PRESS,   CAMBRIDGE,  U.S.A. 


H\ see  I  i A  ne^i'K'S 


PREFACE. 

Thi8  book  is  the  result  of  an  attempt  to  present 
in  concise  and  convenient  form,  and  to  explain,  the 
various  rules  of  law  applicable  to  the  separation  of 
the  returns  from  investments  into  what  is  properly 
income  and  what  should  be  held  as  principal. 
Although  the  subject  is  largely  a  branch  of  the  law 
of  trusts,  no  book  on  trusts  has  given  it  the  detailed 
attention  that  its  importance  deserves.  On  dis- 
puted points  of  law  a  full  citation  of  authorities 
Jaas  been  given,  with  the  purpose  of  indicating  the 
law  in  each  state ;  but  for  the  most  part  only  such 
cases  have  been  cited  as  seemed  necessary  to  illus- 
trate the  principles  which  they  support. 

It  is  hoped  that  the  book  will  prove  useful,  not 

only  to  lawyers,  but  to  trustees  and  accountants, 

and  the  book  has  been  designed  for  such  general 

use. 

EDWIN  A.  HOWES,  Jr. 

October  2,  1905. 


CONTENTS. 

Table  op  Cases xv 

CHAPTER  I. 

Introduction 1 

Definition  of  income  and  of  principal 1 

Real  income  distinguished  from  apparent  income  1 

CHAPTER  n. 

Wasting  Investments     . 4 

Income  must  not  consume  principal 4 

Leasehold  estates 5 

Mines,  quarries,  oil  wells 5 

"Open  "mines 5 

Intention  of  creator  of  estate  prevails     ...  6 

Timber 7 

Not  entirely  income 7 

Estovers  or  botes 7 

English  law  as  to  profit  in  woodland      ...  8 

American  law  as  to  profit  in  woodland  ...  9 

Trees  cut  for  purpose  of  clearing    ...  10 

Trees  blown  down 11 

Trees  cut  in  manner  customary  on  estate  .     .  12 

Intention  of  creator  of  estate  prevails    ...  12 

Bonds  bought  at  a  premium 13 

Premium  to  be  made  up,  how 13 

Intention  of  creator,  effect  of 15 


viii  CONTENTS. 

Bonds  forming  part  of  original  property  ....  16 

No  sinking  fund  in  case  of 16 

Profit  on  sale  of  bonds  belongs  to  principal ...  16 

CHAPTER  m. 

Dividends  on  Shares  of  Stock 17 

Dividends  must  not  waste  principal 17 

Income  of  corporation  not  income  of  stockholder 

until  declaration  of  dividend 17 

Discretion  of  directors  when  to  declare  dividends  17 

Dividends  presumed  to  be  from  income   ....  18 

Regular  dividends 18 

Safe  to  treat  as  from  earnings  unless  stated  to 

be  otherwise 18 

Owner  of  stock  at  time  dividend  declared, 

entitled  to  whole 19 

Wasting  dividends  belong  partly  to  principal  19 

Effect  of  intention  of  creator  of  estate  as  to  19 

Extraordinary  cash  dividends 20 

Not  usually  based  upon  current  earnings    .     .  20 
Accumulation  of  undivided  earnings  increases 

value  of  stock 20 

Apportionment  of,    between    principal    and 

income 21 

Massachusetts    rule    against    apportion- 
ment    22 

Pennsylvania  rule  in  favor  of  apportion- 
ment    23 

Criticisms  of  both  rules 24 

Stock  dividends 25 

Nature  of 25 

Massachusetts  rule  that  they  belong  to  prin- 
cipal       26 

Pennsylvania  rule  that  they  be  treated  the 

same  as  cash  dividends 28 


CONTENTS.  IX 

PAOB 

When  apportioned 28 

Method  of  apportionment 29 

New  York  rule 30 

Option  to  take  cash  or  stock 31 

Treated  as  cash  dividend,  when 31 

Treated  as  stock  dividend,  when 32 

Division  of  old  stock  bought  by  the  company   .     .  33 

Income  if  bought  with  earnings 33 

When  principal 33 

Dividend  in  form  of  bonds  issued  by  the  company, 

similar  to  stock  dividend 33 

Delayed  dividends  distinguished  from  extraordi- 
nary dividends 33 

Dividends  out  of  capital  of  corporation     ....  34 

Meaning  of  word  capital 34 

Fundamental  capital 34 

Working  capital 35 

Floating  capital 35 

Dividends  from  fundamental  capital  belong  to 

principal 35 

Value  of  property  remaining  is  immaterial  36 

Cases  of  mergers 36 

Dividends  out  of  profit  due  to  increase 
in  value  of    fundamental  capital  are 

principal 37 

Dividends  by  land  companies  based  on 

increase  belong  to  income      ....  38 
Dividends  from  capitalized  earnings  belong 

to  principal 39 

Dividends  from  floating  capital  are  dividends 

from  income 39 

Dividends  from  proceeds  of  working  capital 

purchased  with  earnings 41 

On  principle,  should  be  treated  as  from 

income 42 


X  CONTENTS. 

TAtm 

Position  of  courts  doubtful 45 

Dividends  in  liquidation 45 

In  Massachusetts  and  Connecticut  belong 

entirely  to  principal 45 

Rule  in  New  York  different 46 

Rights  belong  to  principal 46 

They  are  not  dividends 46 

Summary  of  chapter 47 

CHAPTER  IV. 

Apportionment    of    Loss    or    Profit    between 

Principal  and  Income 50 

Loss  of  principal  not  made  up  from  income      •     .  50 

Loss  of  income  not  made  up  from  principal  ...  50 

Partial  loss  to  both,  how  apportioned 50 

On  foreclosure  of  mortgage 50 

On  devastavit  by  trustee 53 

Profit  on  foreclosure  proceedings  apportioned  on 

same  principle 62 

CHAPTER  V. 

When  Enjoyment  of  Income  Begins 54 

Enjoyment  of  annuity  or  income  given  by  will 

begins  at  death  of  testator 54 

Different  intention  of  testator  given  effect    ...  54 

Income  in  case  of  delayed  conversion 55 

Beneficiary  entitled  to  equitable  income     .     .  56 

Actual  income  greater  than  equitable      .  56 

Actual  income  less  than  equitable  ...  56 

Method  of  determining  equitable  income  56 

Situations  where  doctrine  is  applied      ...  57 
Investments    in    shipping,    partnership, 

leaseholds,  vacant  land 57 

Doctrine  modified  by  testator's  intention  .     .  58 


CONTENTS.  XI 

FAOB 

Accumulated  income 59 

Belongs  to  principal  if  no  direction  to  pay  out 

as  income 59 

Temporarily  withheld  belongs  to  income   .     .  59 

CHAPTER  VI. 

Outlay 60 

Corpus  to  be  kept  intact 60 

Taxes 60 

Ordinary  taxes  to  be  paid  from  income      .     .  60 

Water  rates  to  be  paid  from  income      ...  60 
Ordinary  taxes  not  usually  apportioned  as  to 

time 61 

Taxes  for  permanent  improvements  ....  61 
Apportioned  between  life-tenant  and  re- 
mainderman       61 

In  case  of  trust  estate,  paid  out  of  principal  62 

Taxes  for  lasting  improvements 62 

Paid  from  income  if  improvements  are 

likely  to  wear  out  during  life  estate      .  62 
If  likely  to  last  longer,  apportioned  be- 
tween corpus  and  income  according  to 

benefit  received  by  each 62 

Taxes  on  unproductive  property  paid  from 

principal 63 

Inheritance  tax  paid  from  estate  or  interest 

taxed 63 

Repairs 64 

Ordinary  repairs  paid  from  income   ....  64 
Additions  and  alterations  paid  from  principal  64 
On  newly  purchased  property,  paid  from  prin- 
cipal       65 

Trustee's  judgment  in  apportioning  expense 
of  repairs  and  improvements  not  disturbed 

unless  clearly  wrong 65 


Xll  CONTENTS. 

PAOi 

Insurance 66 

Life  tenant  not  bound  to  insure 66 

Trustee  bound  to  insure  whole  estate     ...  66 

Expense  payable  from  income 66 

Insurance  money  on  whole  estate  is  principal  66 

Incumbrances 66 

Interest  on,  paid  from  income 66 

Principal  of,  if  paid  by  trustee  comes  out  of 

corpus 67 

If  principal  of  is  paid  by  remainderman,  life 
tenant  must  continue  to  pay  interest       .     .  67 
Expenses  of  management  of  estate  paid  from  in- 
come    67 

Trustee's  charges  for  services 67 

Trustee's  commissions  for  collection  of  prin- 
cipal       68 

Brokerage  on  changes  of  investment      ...  68 
Brokerage  on  purchase  or  sale  of  real  estate 

charged  to  principal 68 

Costs  and  expenses  of  bill  for  instructions  payable 

from  principal 69 

Expenses  of  administration  payable  from  principal  69 

CHAPTER  Vn. 

Apportionment  of  Current  Income  as  to  Time  70 

General  principle 70 

Rent  not  apportionable  by  common  law  ....  70 

Rent,  to  what  extent  apportionable  by  statute       .  71 

Annuities 73 

Definition  of 73 

Not  apportionable  by  common  law   ....  78 

Exceptions  to  general  rule 73 

Annuities  for  support 73 

Annuities  in  lieu  of  dower 73 

To  what  extent  apportionable  by  statute    .     .  74 

Payable  when .  74 


CONTENTS.  xm 

PiLOB 

Dividends,  regular 74 

Not  apportioned .  74 

Effect  of  apportionment  statutes  ..'...  75 
Declared  before  but  paid  after  death  of  life 

tenant,  are  income 76 

By  savings  banks  are  not  apportioned    ...  77 

Profits  of  business  not  apportioned 76 

Interest 77 

On  debts  and  loans  apportioned 77 

On  mortgage  notes  apportioned 78 

On  public  debt  not  apportioned 78 

On  coupon  bonds        78 

Not  apportioned  in  some  States      ...  78 

Apportioned  in  other  States 79 

CHAPTER  Vin. 

A  SrwnwARY  of  the  Statutes  and  Decisions  in 
THE  Various  States  bearing  upon  Apportion- 
ment OF  Current  Income 80 

Arkansas 80 

Connecticut 80 

Delaware 8^^ 

Georgia 81 

Illinois 81 

Indiana 81 

Indian  Territory 81 

Iowa 82 

Kentucky 82 

Massachusetts 82 

Michigan 84 

Mississippi 84 

Missouri 85 

New  Hampshire 85 

New  Jersey 85 


XIV  CONTENTS. 

PAOB 

New  York 85 

North  Carolina 87 

Ohio 87 

Pennsylvania 87 

Rhode  Island 88 

South  Carolina 88 

Tennessee 89 

Virginia 89 

West  Virginia 89 

Wisconsin 89 

Index 93 


TABLE  OF  CASES  CITED. 


Paoe 
Abbll  v.  Brady  64 

Adams  v.  Adams  23,  27,  71,  75, 
83 
Allis'  Estate,  In  re  13 

Armitage,  In  re  23,  46 

Armstrong  v.  Wilson  8 

Ashhurst  v.  Field's  Adra'r       29 
Atkins  V.  Albree  46 

Ayer  v.  Ayer  54 

Babcock,  Matter  of  61 
Bailey's  Estate  73,  88 
Balch  V.  Hallet  5,  39 
Banner  v.  Lowe  78 
Bartlett,  Petitioner  69 
Bateman  v.  Hotchkin  (No.  2)  11 
Bates  V.  Barry  73 
Bates  V.  Mackinley  25,  77 
Bedford's  Appeal  7,  13 
Biddell's  Appeal  46 
Blakley  v.  Marshall  5 
Blight  w.  Blight  74,88 
Bobb  V.  Wolff  62 
Borie  v.  Crissman  72 
Bouch  V.  Sproule  27,  33,  45 
Bowditch  V.  Soltyk  69 
Bradley  v.  Bailey  80 
Bradley's  Estate  63 
Bridge  v.  Bridge  60,  66 
Brinley  v.  Grou  46 
Browne  v.  Collins  76 
Brown  v.  Gellatly  57 
Brown  and  Lamed,  Petition- 
ers 27 
Brown  v.  Wright  59 


Paoe 
Brown's  Estate  64 

Buckingham  v.  Morrison         58 
Bulkeley  v.  Stephens  77 

Burt  V.  Gill  59 

Butterbaugh's  Appeal  67 


Cairns  v.  Chabert 

60 

Caldecott  v.  Brown 

64 

Chase  v.  Darby 

73, 

74,84 

Clapp  V.  Astor 

70, 

75,86 

Clark  V.  Holden 

10 

V.  Middles  worth 

63 

Clemence  v.  Steere 

11,64 

Clifford  V.  Davis 

54 

Clyburn  v.  Eeynolds 

66 

Cobb  V.  Fant 

24,29 

Connolly's  Estate  (No 

•1) 

24 

Cook  V.  Lowry 

63 

Crump's  Estate 

61 

Cashing  v.  Burrell 

54 

Cushing's  Will,  In  re 

73 

Daland  v.  Williams  26,  33 

Danly  v.  Cumrains's  Ex'r        68 
Dashwood  v.  Magniac  8,  12 

Davis  V.  Jackson  18,  25,  31 

Deane    v.  Home  for   Aged 

Colored  Women  69 

De  Koven  v.  Alsop       23,  27,  46 
De  Witt  V.  Cooper  60,  66 

Dexter  v.  Phillips         70,  71,  78, 
79,84 
D'Ooge  V.  Leeds  26,  83 

Drown  v.  Smith  10 

DufEord  V.  Smith  60 


XVI 


TABLE   OF  CASES  CITED. 


Paob 

Eakp's  Appeal  24,  29,  30 

Earp's  WUl  79 

Edwards  v.  Edwards  56,  57 

Eichelberger's  Estate  64 

Eisner's  Appeal  47 

Eley's  Appeal  6,  7,  13 


FiNDLAY  V.  Smith 
Fleet  V.  Borland 
Flickwir's  Estate 
Foote,  Appellant 
Franklin,  Matter  of 


12 
62 
54 

75,84 
72,86 

16 


Gerry,  Matter  of 

Gbeen  v.  Osbom  88 

Gibbons  v.  Mahon       18,  20,  23, 

27,28 

Gibson  v.  Bott  74 

GifEord  v.  Thompson    21,  23,  46 

Gilkey  v.  Paine  33 

Gordon  v.  West  68 

Graham's  Estate  16 

Granger  v.  Bassett  75,  83 

Green  v.  Crapo  58 

Greene  v.  Huntington       75,  77, 

80 

V.  Smith  27,  46 

Hagan  v.  Piatt  52 

V.  Varney  60 

Harrison  v.  Pepper  66 

Harrison's  Trust,  In  re        8,  11 
Healey  v.  Toppan  55,  57 

Heard  v.  Eldredge  17,  35,  36,  68 
Heighe  v.  Littig  58 

Heizer  v.  Heizer  73 

Hemenway  v.  Hemenway  14,  23, 
39,  40,  41,  45,  46,  84 
Henry  v.  Henderson  73,  74 

Hill  V.  Newichawanick  Co.  76, 86 
Hite's  Devisees  v.  Hite's  Ex'r 

15, 23,  31,  46,  58 
Hitner  v.  %e  62,  63 

Holmes  v.  Taber  60,  61 

Honywood  v.  Honywood       8,  9 
Hoyt,  Matter  of  16 

Hubbuck,  In  re  52 

Huff  V.  Latimer  88 


Huston  V.  Tribbetts 
Hyatt  V.  Allen 


Paoi 

62 

75,86 


Johnson,  Matter  of  13 

V.  Bridge  water,  etc.,  Co.  77 
V.  Johnson  10, 1 1 

Jones  V.  Ogle  76 

Kane,  Matter  of  86-- 

Kearney  o.  Cruikshank      73,  74 
V.  Ex'r  of  Kearney  64 

Keeler  v.  Eastman  10 

Keith  V.  Copeland  55 

Kernochan,  Matter  of  20, 21, 23, 
71,86 
King  V.  Miller  10 

Kinmonth  v.  Brigham  55,  57 
Koen  V.  Bartlett 

Lackawanna  Iron  and  Coal 

Co.,  In  re  73,  85 

Lang's  Ex'r  v.  Lang  24,  29 

Leland  v.  Hayden  33,  41 

Lester  v.  Young  11 

Little  V.  Little  64,  65 

Lord  Londesboroughw.  Som- 

erville  77 

Lord  V.  Brooks  29 

Lovering  v.  Minot  54 

Lowry  v.  Farmers'  Loan  & 

Tr.  Co.  31 

Lyman  v.  Pratt  31 

Malam,  In  re  31 

Mann  v.  Anderson  75 

Marshall  v.  Moseley  86 

Martens'  Estate,  In  re  63 

Martin  v.  Martin  67 

McClintock  v.  Dana  6,  7 

McCullough  V.  Irvine's  Ex'rs  10 
McKeen's  Appeal  71,  76,  88 
McLouth  u.  Hunt  31 

Meldon  v.  Devlin  52 

Meldrin  v.  Trustees  of  Trin- 
ity Church  as 
Mercer  v.  Buchanan     35,  36,  38 
Millen  v.  Guerrard             23,  31 
Miller,  Estate  of                      62 


TABLE   OF   CASES   CITED. 


XVll 


Paob 
Miller  v.  Crawford  72,  86 

Mills,  Adm'r  v.  Britton  33 

Minot  V.  Paine         17,  28,  26,  40 
V.  Tappan  59 

V.  Thompson  5,  56,  67 

Modlin  V.  Kennedy  10, 11 

Moore  v.  Simonson  61,  67 

Morehouse  v.  Cotheal  11 

Moss's  Appeal  46,  47 

Mower  v.  Sandford  74,  80 

Mudge  V.  Parker  55,  67 

Murch  V.  Smith  M'f  g  Co.  63,  64 

Neel's  Estate  63 

Nehls  V.  Sauer  73,  82 

New  England  Trust  Co.  v. 

Eaton  13,  14,  15 

N.  Y.  Life  Ins.  &  Tr.  Co.  v. 

Baker  13 

Noble  V.  Tyler  87 

Noyes  v.  Stone  8 


Oliver's  Estate 
Outcalt  V.  Appleby 
Owen  V.  Hyde 


39 
68 
10 

68,69 


Parkeb  v.  Ames 
V.  Hill 

V.  Seeley  62,  74,  85 

Park's  Estate  16,  62 

Parr,  In  re  64 

Parsons  v.  Winslow  62,  63,  65 
Patterson  v.  Johnson  68 

Pearly  v.  Smith  78 

Peek  V.  Sherwood  62 

Peirce  v.  Burroughs  29, 46, 60,  67 
Penn-Gaskell's  Estate  (No.  2)  15 
Perry  v.  Aldrich  85 

Pitcairn,  In  re  68 

Plyrapton    v.   Boston    Dis- 
pensary 60,  62,  63,  67 
Pratt  V.  Douglas  62,  64 
Pritchitt   V.   Nashville    Tr. 

Co.  24,  29 

Proctor,  Matter  of  16 

QuiNN  V.  Madigan       69,  73,  85 
V.  Safe  Dep.  &  Tr.  Co.  25, 40 


Page 
Rand  v.  HubbeU  18,  20,  22,  23, 
27,33 
Redmon  v.  Bedford  72,  82 

Reed  v.  Head  16,  19 

Reyburn  v.  Wallace  62,  63 

R.  I.  Hospital  Tr.  Co.  v. 

Harris  74 

Richardson  v.  Richardson  28,  27 
Ridge,  In  re  6,  7 

Riggs  V.  Cragg  78,  86 

Rogers,  Matter  of   36,  40,  41,  46 
Ross's  Estate  75,  88 

Rowan  v.  Riley  72,  89 

Rutledge,  Ex  parte  75 

Sargent  v.  Sargent     16,  54,  83, 

84 

Sayers  v.  Hoskinson  10 

Second  Un.  Ch.  v.  Colegrove  21, 

23,  27,  40,  46 

Shaw  V.  Cordis  16 

Shoemaker's  Appeal  6 

Smith  V.  Dana  18,  39,  42 

V.  Fellows  54 

V.  Hooper  37,  38 

V.  Smith  10,  11 

Smith's  Estate  24,  29 

Sohier  v.  Eldridge         64,  65,  70 

Spangler's  Estate  68 

Spencer  v.  Scurr  6 

Spooner  v.  Phillips  27 

Stewart  v.  Phelps  41 

Stone  V.  Littlefield  52,  63 

Stonebraker  v.ZoUickoffer  10, 11 

Thomas  v.  Gregg  24,  29,  30 
Thomson's  Estate  39,  47 
Tracy,  Matter  of  60 
Tragbar's  Estate  63 
Trenton  Tr.  etc.  Co.  v.  Don- 
nelly 51,  53 
Tuttle's  Case  52 

U.  S.  Trust  Co.  V.  Tobias  79,  87 

Van  Doren  v.  Olden  21,  24,  29 
Varney  v.  Stevens  60 

Vinton's  Appeal  36,  36 


xvm 


TABLE  OF  CASES  CITED. 


Paok 
Walker's  Ex'r  v.  Walker     17, 
18.  35,  36 
Warden  v.  Ashburner  78 

Waterman  v.  Alden  23,  31 

Weeks,  Matter  of  86 

Weld  V.  Putnam  54 

Wentz's  Appeal  7 

Westcott  V.  Nickerson        55,  57 
Wethered  v.  Safe  Dep.  &  Tr. 

Co.  54 

Wheeler  v.  Perry    17,  35,  36,  38 
White  V.  Stanfield  71,  83 

Wiggin  V.  Swett  73 


Pasb 

Wilkinson  v.  Wilkinson  10 

Willard's  Ex'r  j;.  Willard  56,  57 
Williams  v.  Bradley  59 

Williard  v.  Wllliard  12 

Wilson  V.  Harman  78 

V.  Youst  6 

Wilson's  Appeal  79 

Wiltbank's  Appeal  47 

Woodb  urn's  Estate  6 

Wordin's  Appeal    62,  63,  67,  68 


Young,  Matter  of 


72,86 


THE  AMERICAIT  LAW 

RELATING  TO 

INCOME  AND  PRINCIPAL. 


CHAPTEE  I. 
INTRODUCTION. 

Income  of  property  consists  of  the  proceeds  of 
what  the  property  produces,  the  profit  which  comes 
from  its  use  in  business,  or  what  is  paid  for  its  use 
by  another  than  its  owner.  Principal,  or  capital,  is 
the  property  itself.  The  absolute  owner  of  the 
property  is  likely  to  treat  as  income,  not  only  the 
earnings  of  the  principal  property,  but  all  increase 
which  conies  from  an  increase  in  the  value  of  the 
property  itself,  treating  as  principal  what  he  paid 
for  the  property,  and  as  income  all  excess  over  the 
original  investment.  A  person  entitled  to  the  use 
or  income  of  property,  or  a  trustee  whose  duty  it 
is  to  pay  income  to  one  person  or  set  of  persons, 
holding  the  principal  for  others,  must  be  more  care- 
ful to  distinguish  between  real  income  and  increase 
which  comes  from  an  increase  in  the  value  of  the 
property. 


2  INCOME  AND   PRINCIPAL. 

The  corpus  or  principal  of  a  trust  is  not  the  cash 
of  which  it  may  have  originally  consisted,  or  the 
cash  value  at  the  time  of  appraisal,  but  the  actual 
property  in  which  it  may  be  invested  for  the  time 
being.  When  trust  funds  are  invested  in  the  pur- 
chase of  shares  of  stock  in  a  railroad  company,  the 
principal  is,  not  the  cash  paid  for  the  stock,  but  the 
stock  itself,  and  if  that  is  later  sold  for  more  than 
the  trustee  paid  for  it,  the  increase  is  not  income 
but  belongs  to  principal. 

The  owner  of  a  mine  is  likely  to  consider  the 
product  of  a  mine  as  income.  It  is  not  real  income, 
but  is  part  of  the  property  itself.  Although  timber 
is  a  real  product  of  the  land,  the  production  of  it 
covers  so  long  a  period  that  a  life  tenant  or  a 
trustee  for  a  life  beueficiary  cannot  ordinarily  treat 
it  as  income,  because  the  taking  of  it  strips  the 
land  of  something  which  cannot  be  replaced  while 
the  life  interest  lasts.  Other  kinds  of  property,  usu- 
ally to  a  less  degree,  naturally  waste  away  by  being 
used  in  the  ordinary  manner,  and  the  entire  product 
cannot  be  treated  as  real  income  in  the  strict  mean- 
ing of  the  word.  There  must  be  deductions  from 
the  product  from  time  to  time  to  replace  the  waste 
in  the  principal  property. 

The  owner  of  property  may,  of  course,  give  to  a 
person  whom  he  designates  as  life  tenant  the  right 
to  increase  of  principal,  as  well  as  income,  and  the 
full  product  of  timber  or  mining  land,  but  the 
word  income  in  a  will  or  deed  will  be  taken  in  its 


INTKODUCTION.  6 

restricted  meaning  unless  the  circumstances  or  other 
proper  evidence  show  that  he  intended  to  use  it  in 
an  enlarged  sense. 

The  necessity  of  distinguishing  carefully  between 
income  and  principal  is  imposed  chiefly  upon  trus- 
tees, and  with  them  it  is  a  matter  of  great  im- 
portance ;  but  the  same  necessity  is  imposed  upon 
life  tenants  who  have  possession  and  control  of 
the  property,  and  the  same  general  principles  apply 
to  both. 


CHAPTER  II. 

WASTING  INVESTMENTS. 

Income  must  not  consume  the  Principal.  A  person 
entitled  to  the  use  and  income  of  property  for  life, 
or  for  a  time  otherwise  limited,  must  provide  for  re- 
pairing the  waste  of  the  corpus  which  comes  from 
its  use  or  from  lapse  of  time.  Similarly,  a  trustee 
who  holds  property  under  directions  to  pay  the  in- 
come to  one  person  or  set  of  persons  for  a  time  must 
preserve  the  principal  or  corpus  of  the  estate  intact 
from  the  ordinary  processes  of  waste,  by  deductions 
from  income.  This  does  not  mean  that  the  value 
of  the  principal  fund  must  always  be  kept  up  out 
of  income ;  that,  in  a  trust  estate  or  life  estate,  is 
usually  changing,  sometimes  increasing  and  some- 
times decreasing.  Mere  decrease  in  value  should 
not  be  made  up  out  of  income,  nor  should  in- 
crease in  value  be  added  to  income.  Loss  of 
principal  by  unfortunate  investment  or  by  misap- 
propriation of  the  actual  corpus  must  ordinarily  be 
borne  by  the  principal.  But  whenever  a  payment 
to  the  trustee  or  life  tenant  of  what  is  called  income 
reduces  the  value  of  the  investment,  or  whenever 
the  value  of  the  investment  decreases  from  mere 


WASTING  INVESTMENTS.  5 

lapse  of  time,  part  of  what  is  received  as  income 
should  be  added  to  the  principal  to  repair  the  waste, 
unless  the  intention  of  the  creator  of  the  trust 
estate  or  the  life  estate  was  opposed.  (Balch  v. 
Hallet,  10  Gray.  402.) 

Leasehold  Estates.  Bent  from  a  leasehold  estate 
held  in  trust  for  the  benefit  of  persons  successively 
interested  belongs  partly  to  corpus  and  only  partly 
to  real  income,  because  the  value  of  the  leasehold 
grows  less  from  rent  day  to  rent  day  and  will  ulti- 
mately be  wiped  out.  (Balch  v.  Hallet,  10  Gray 
402 ;  Minot  v.  Thompson,  106  Mass.  583.) 

Mines,  Quarries,  Oil  "Wells.  The  products  of  mines, 
quarries,  or  oil  wells  are  really  not  products,  but 
part  of  the  land  itself,  which  once  used  cannot  be 
replaced.  Such  products,  therefore,  do  not  come 
within  the  strict,  narrow  meaning  of  the  word  in- 
come. A  life  tenant  has  no  right  to  open  new 
mines,  quarries,  or  wells  on  the  land.  If  a  trustee 
opens  new  mines,  quarries,  or  wells,  the  product,  or 
the  rent  or  royalties,  are  principal  in  the  absence  of 
any  contrary  intention  on  the  part  of  the  creator  of 
the  trust.  He  should  invest  such  proceeds  and  pay 
the  income  to  those  entitled  to  the  use,  benefit,  or 
income  of  the  estate.  (Blakley  v.  Marshall,  174  Pa. 
St.  425 ;  Wilson  v.  Youst,  43  W.  Va.  826 ;  In  re 
Eidge,  31  Ch.  D.  504,  508.) 

"  Open  "  Mines.  A  tenant  for  life  has  the  right  to 
operate  for  his  own  benefit  such  mines,  quarries,  or 
oil  wells  as  were  "open"  when  he  came  into  the 


6  INCOME  AND  PRINCIPAL. 

estate,  and  he  is  entitled  to  the  entire  net  proceeds. 
(Koen  V.  Bartlett,  41  W.  Va.  559 ;  Spencer  v.  Scurr, 
31  Beav.  334.)  He  may  operate  such  mines,  quar- 
ries, or  wells  to  exhaustion,  without  providing  for 
replacing  them.  (Eley's  Appeal,  103  Pa.  St.  300 ; 
Shoemaker's  Appeal,  106  Pa.  St.  392.)  Similarly 
a  person  entitled  to  the  income  of  land  left  in  trust, 
on  which  there  were  mines,  quarries,  or  wells  which 
were  open  when  the  trust  estate  began  or  which  the 
trustee  was  given  the  right  to  open  by  the  will 
creating  the  trust,  is  entitled  to  the  net  proceeds  of 
the  coal  or  minerals  or  oil,  or  to  the  entire  rent  or 
royalties  received.  No  provision  need  be  made 
to  replace  the  inevitable  waste  of  the  corpus. 
(Woodburn's  Estate,  138  Pa.  St.  606 ;  Eley's  Appeal, 
103  Pa.  St.  300 ;  McClintock  v.  Dana,  106  Pa.  St. 
386 ;  Spencer  v.  Scurr,  31  Beav.  334.) 

Mines  or  wells  are  "  open "  although  the  creator 
of  the  trust  or  life  estate  may  not  have  been  oper- 
ating them  himself.  For  example,  if  he  had  leased 
land  for  oil  purposes,  stipulating  for  the  delivery  to 
him  of  a  definite  part  of  the  oil  produced,  a  bequest 
of  the  income  of  his  estate  would  include  these 
royalties.     (Woodburn's  Estate,  138  Pa.  St.  606.) 

If  the  will  or  deed  creating  the  life  estate  or  the 
trust  shows  an  intention  by  the  testator  or  grantor 
that  the  land  is  to  be  used  for  mining,  quarrying,  or 
oil  purposes,  the  use  and  income  will  be  taken  to 
mean  the  entire  net  income  without  provision  to 
repair  waste,  unless  a  contrary  intention  of  the  tes- 


WASTING  INVESTMENTS.  7 

tator  or  grantor  appears.  The  decisions  on  this 
point  go  wholly  on  the  expressed  or  implied  inten- 
tion of  the  grantor  or  testator.  (Eley's  Appeal,  103 
Pa.  St.  300  ;  McClintock  v.  Dana,  106  Pa.  St.  386 ; 
In  re  Ridge,  31  Ch.  D.  504,  508.) 

Where  a  testator  empowered  his  executors  to 
lease  land  which  he  knew  to  be  valuable  only  as 
coal  land,  it  was  held  to  be  his  intention  that  the 
entire  income  from  a  lease  for  coal-mining  purposes 
should  belong  to  the  life  tenant.  (Wentz's  Appeal, 
106  Pa.  St.  301.  For  a  similar  interpretation  of  a 
deed  see  Bedford's  Appeal,  126  Pa.  St.  117.) 

Timber.  The  ordinary  produce  of  land,  such  as 
crops  and  fruit,  belongs  to  the  persons  entitled  to 
income,  but  timber,  although  a  product  of  the  land, 
cannot  ordinarily  be  given  entirely  to  a  life  tenant 
or  to  a  person  entitled  to  income  for  a  limited  or 
uncertain  time.  It  takes  a  timber  crop  so  long  to 
mature  that  it  cannot  ordinarily  be  classed  as  one 
of  the  fruits  produced  during  the  period  of  enjoy- 
ment of  a  person  whose  estate  is  limited  as  to  time. 

It  is  universal  law  that  a  life  tenant,  legal  or  equit- 
able, is  entitled  to  cut  such  timber  as  is  necessary  for 
the  repair  of  buildings  and  fences  on  the  estate  and 
enough  small  growth  of  trees  for  his  own  use  for 
firewood.  Such  timber  is  known  as  "estovers"  or 
"  botes."  (Tiffany  on  Eeal  Property,  Vol.  I,  p.  566.) 
A  trustee  having  the  possession  and  control  of  land 
partly  wooded  would  need  to  provide  for  repairs  on 
the  estate  out  of  the  woodland,  if  it  were  adequate. 


8  INCOME  AND  PRINCIPAL. 

This  right  of  estovers  is  confined  to  a  cutting  for 
use  on  the  estate  where  the  wood  was  growing,  and 
a  life  tenant  has  no  right  to  cut  wood  for  sale,  or 
for  use  on  another  estate.  (Noyes  v.  Stone,  163 
Mass.  490  ;  Armstrong  v.  Wilson,  60  111.  226.) 

English  Law  as  to  Timber.  In  England  by  the 
common  law  a  life  tenant,  legal  or  equitable,  has 
certain  well-defined  rights  of  profit  in  woodlands 
growing  on  the  estate.  Except  for  estovers  or  botes, 
a  life  tenant  who  is  impeachable  for  waste,  and  a 
life  tenant  is  always  impeachable  for  waste  unless 
the  settlor  or  grantor  has  shown  an  intention  to  the 
contrary,  is  not  entitled  to  cut  timber.  Timber 
under  the  general  law  of  England  includes  oak,  ash, 
and  elm  trees  which  have  reached  the  age  of  twenty 
years,  and  are  not  so  old  as  not  to  contain  a  reason- 
able quantity  of  usable  wood  in  them.  In  some 
counties  custom  has  made  other  kinds  of  trees 
timber  after  they  have  reached  a  certain  age.  If, 
however,  the  customary  course  of  management  of 
the  property  has  been  to  make  annual  cuttings  of 
timber  trees  as  they  became  ripe,  the  life  tenant 
is  entitled  to  make  such  cuttings  and  treat  them  as 
annual  fruits  belonging  to  income.  (Honywood  v. 
Hony  wood,  L.  E.  18  Eq.  306  ;  Dashwood  v.  Magniac, 
(1891),  3  Ch.  306 ;  In  re  Harrison's  Trusts,  L.  E.  28 
Ch.  D.  220.) 

A  life  tenant  who  is  impeachable  for  waste  can 
cut  all  wood  that  is  not  timber,  with  certain  impor- 
tant exceptions.     He  cannot  cut  ornamental  trees. 


WASTING  INVESTMENTS.  9 

or  fruit  trees,  or  trees  planted  to  protect  banks  of 
streams.  He  must  not  cut  the  stools  of  underwood. 
He  must  not  cut  those  trees  which  would  be  timber 
if  they  were  twenty  years  old,"  except  for  the  pur- 
pose of  thinning  in  order  to  allow  a  proper  devel- 
opment of  the  remaining  trees.  (Honywood  v. 
Honywood,  L.  K.  18  Eq.  306.) 

These  rules  laid  down  in  the  English  courts  are 
obviously  suited  to  a  country  where  the  custom 
prevails  of  preserving  wooded  estates  as  a  perma- 
nent source  of  annual  income,  derived  from  cutting 
the  timber  trees  as  they  ripen,  but  of  seldom  en- 
tirely clearing  the  land  of  woods.  The  English 
courts  have  moreover  had  opportunity  to  develop 
the  law  from  the  frequency  of  life  estates  and  trust 
estates  in  landed  property. 

American  Law  as  to  Timber.  In  this  country 
where  the  forests  are  chiefly  a  natural,  rather  than 
a  cultivated,  growth,  and  trusts  of  landed  estates  are 
comparatively  few,  the  courts  have  not  yet  had  much 
occasion  to  deal  with  the  problems  which  have  de- 
veloped the  law  in  England.  Our  courts  neverthe- 
less have  always  recognized  and  applied  to  such 
cases  as  have  come  before  them  the  fundamental 
principle  to  be  found  in  the  English  cases,  viz. :  that 
a  life  tenant  or  life  beneficiary  shall  not  be  allowed 
to  use  up  in  his  enjoyment  of  the  estate  what  con- 
stitutes the  value  of  the  estate,  unless  it  is  evident 
that  the  grantor  or  testator  intended  that  he  should. 

The  American  courts  do  not  seem  to  have  distin- 


10  INCOME   AND   PRINCIPAL. 

guished  between  timber  and  other  trees,  but  seem 
to  have  laid  down  the  rule  that  a  life  tenant  com- 
mits waste  if  he  cuts  down  any  trees  except  what 
he  needs  for  repairs  on  the  estate  or  for  firewood, 
and  except  dead  trees  and  those  too  old  for  timber. 
(Clark  V.  Holden,  7  Gray,  8 ;  Johnson  v.  Johnson, 
18  N.  H.  594 ;  Smith  v.  Smith,  105  Ga.  106,  111 ; 
Modlin  V.  Kennedy,  53  Ind.  267 ;  Stonebraker  v. 
Zollickoffer,  52  Md.  154)  But  there  are  many  de- 
cisions to  the  effect  that  if  a  life  tenant  cuts  down 
trees  in  the  process  of  clearing  land  for  cultivation, 
when  it  is  good  husbandry  to  make  such  clearing, 
he  is  not  guilty  of  waste,  and  is  entitled  to  the  pro- 
ceeds of  the  trees  if  he  sells  them.  The  argument 
is  that  in  a  new  country  the  life  tenant  should  not 
be  discouraged  from  increasing  the  area  of  cultiva- 
tion, and  should  be  allowed  to  have  the  proceeds  of 
the  trees  as  a  compensation  for  improving  the  land. 
(Smith  V.  Smith,  105  Ga.  106,  111 ;  Sayers  v.  Hos- 
kinson,  110  Pa.  St.  473  ;  Wilkinson  v.  Wilkinson, 
59  Wis.  557,  561 ;  Keeler  v.  Eastman,  11  Vt.  293 ; 
M'CuUough  V.  Irvine's  Ex'rs,  13  Pa.  St.  438,  443 ; 
King  V.  Miller,  99  K  0. 583 ;  Owen  v.  Hyde,  6  Yerg. 
(Tenn.)  334;  Drown  v.  Smith,  52  Maine,  141. 
Clark  V.  Holden,  7  Gray,  8,  seems  contra.^ 

It  is  probable  that  a  life  tenant  would  not  be  al- 
lowed to  retain  proceeds  of  timber  cut  in  such  a 
case  except  when  the  proceeds  over  and  above  the 
expense  of  cutting  were  inconsiderable. 

But  if  the  clearing  is  bad  husbandry  or  if  the 


WASTING  INVESTMENTS.  11 

trees  are  cut  for  the  purpose  of  selling  them  or 
of  using  them  off  the  land,  the  proceeds  belong  to 
the  remainderman  or  to  the  corpus  of  the  estate, 
(Johnson  v.  Johnson,  18  N.  H.  594 ;  Smith  v. 
Smith,  105  Ga.  106,111;  Modlin  v.  Kennedy,  53 
Ind.  267 ;  Lester  v.  Young,  14  K.  I.  579  ;  More- 
house V.  Cotheal,  22  N.  J.  Law,  521 ;  Clemence  v. 
Steere,  1  R  L  272.) 

The  reasoning,  which  gives  to  a  life  tenant  in  pos- 
session the  proceeds  of  trees  cut  in  the  process  of 
clearing  the  land  for  its  improvement,  does  not  ap- 
ply to  a  trustee  in  possession  or  control  of  the  land, 
since  he  can  charge  the  cost  of  improvements  to  the 
corpus  of  the  estate.  On  principle  a  trustee,  then, 
should  not  give  to  income  the  proceeds  of  timber 
cut  under  such  circumstances.  There  are,  however, 
no  cases  on  this  point. 

Where  timber  is  blown  down  a  tenant  for  life  is 
absolutely  entitled  to  the  proceeds  of  such  as  he 
would  have  been  entitled  to  cut  as  thinnings  or  as 
ripened  timber  or  for  firewood.  The  proceeds  of  the 
other  trees  are  to  be  invested  and  the  income  paid 
to  him.  (Bateman  v.  Hotchkin  (No.  2),  31  Beav. 
486 ;  In  re  Harrison's  Trusts,  L.  E.  28  Ch;  D.  220  ; 
Stonebraker  v.  ZoUickoffer,  52  Md.  154.)  i 

^  In  Stonebraker  v.  ZoUickoffer,  52  Md.  154,  a  storm  of  wind 
had  blown  down  a  large  quantity  of  timber.  The  trustee  converted 
part  of  this  into  cooper-stuff  and  sold  it,  selling  the  remainder  for 
firewood.  It  was  held  that  the  proceeds  of  the  cooper-stuff  be- 
longed to  principal,  and  that  tlie  proceeds  of  the  firewood  belonged 
to  income  for  the  life  tenant  upon  the  supposition  that  nothing 


12  INCOME  AND   PRINCIPAL. 

A  life  tenant,  in  the  absence  of  anything  in  the 
will  or  deed  to  show  a  contrary  intention  of  the  tes- 
tator or  grantor,  has  the  right  to  cut  wood  as  a  source 
of  profit  in  the  manner  customary  on  the  estate  be- 
fore his  interest  was  established.  (Williard  v.  Wil- 
liard,  56  Pa.  St.  119 ;  Findlay  v.  Smith,  6  Munf. 
(Va).  134 ;  Dashwood  v.  Magniac,  L.  E.  (1891) 
3  Ch.  306.)  Thus  in  Findlay  v.  Smith  where  a  tes- 
tator devised  to  his  wife  for  life  an  estate  on  which 
there  were  salt  works,  giving  her  power  to  operate 
the  salt  works  for  her  benefit,  it  was  held  that  the 
widow  had  the  right  to  cut  from  the  estate  all  the 
wood  that  she  needed  for  fuel  in  the  operation  of 
the  salt  works  and  was  not  limited  to  the  quantity 
used  by  the  testator.  It  had  been  his  custom  to 
cut  from  the  estate  all  the  fuel  he  needed  for  that 
purpose. 

Such  customary  use  may  authorize  the  life  tenant 
even  to  clear  the  laud  of  the  timber,  and  a  bequest 
of  the  income  of  timber  land  which  the  testator 
himself  was  in  the  process  of  clearing  would  proba- 
bly be  taken  to  include  the  entire  net  proceeds  of 
the  timber.  (Williard  v.  Williard,  56  Pa.  St.  119.) 
Such  timber  land  would  probably  be  treated  just  as 
open  mines  are  treated,  although  the  income  from 

which  was  valuable  as  timber  had  been  converted  into  firewood. 
Tho  tenant  for  life  is  entitled  to  old  trees  which  cannot  be  used  as 
timber,  and  to  the  tops  and  smaller  branches  of  trees  which  are 
felled  for  timber,  and  to  the  regular  thinnings  and  trimmings  of 
trees  in  the  woods.  He  may  sell  them,  and,  if  he  does,  is  entitled 
to  the  proceeds. 


WASTING  INVESTMENTS.  13 

it  is  exhausting  the  corpus.  It  is  a  question  of  the 
testator's  or  grantor's  intention.  (Eley's  Appeal,  103 
Pa.  St.  300 ;  Bedford's  Appeal,  126  Pa.  St.  117.) 

Bonds  bought  at  a  Premium.  To  a  certain  extent 
bonds  bought  at  a  premium  are  a  wasting  invest- 
ment, because  if  they  are  held  until  maturity  the 
premium  will  be  entirely  lost,  and,  even  if  they  are 
not  held  until  maturity,  other  things  being  equal, 
the  premium  will  gradually  grow  smaller  as  ma- 
turity approaches.  Accordingly  it  has  been  held  in 
some  jurisdictions  that  a  trustee  who  has  purchased 
bonds  at  a  premium  should  deduct  from  the  various 
collections  of  interest  and  add  to  the  principal  such 
sums  as  will  replace  the  premium  if  the  bonds  are 
held  until  maturity.  That  is,  he  should  establish  a 
sort  of  sinking  fund  to  repair  the  waste  of  principal. 
(New  England  Trust  Co.  v.  Eaton,  140  Mass.  532  ; 
N.  Y.  Life  Insurance  &  Trust  Co.  v.  Baker,  165 
K  Y.  484  ;  In  re  Allis'  Estate,  101  K  W.  365  (Wis. 
Nov.  15,  1904.)  Contra,  Matter  of  Johnson,  57 
App.  Div.  (N.  Y.)  494,  502.)  This  should  be  done 
although  the  bonds  will  not  mature  until  after  the 
termination  of  the  trust.  (In  re  Allis'  Estate,  101 
N.  W.  365.) 

If  after  this  is  done  the  bonds  should  be  sold  at 
a  larger  premium  than  was  paid  for  them,  it  has 
been  held  that  the  premium  received  belongs  to  the 
principal,  and  also  such  of  the  sinking  fund  as  has 
already  been  accumulated.  The  entire  increase  in 
value,  representing  the  excess  over  the  cost  and  the 


14  INCOME  AND   PRINCIPAL. 

sinking  fund  already  accumulated,  is  regarded  as  an 
increase  in  the  value  of  the  corpus.  (New  England 
Trust  Co.  V.  Eaton,  140  Mass.  532.)  ^ 

1  Note  on  the  Massachusetts  Law.  There  is  some  doabt 
whether  the  case  of  New  England  Trust  Co.  v.  Eaton,  140  Mass. 
532,  goes  to  the  extent  of  establishing  the  rule  that  a  trustee  must 
provide  a  sinking  fund  to  replace  premiums.  The  actual  decision 
goes  no  further  than  that  a  trustee  who  has  done  so  has  acted  properly. 
In  a  previously  decided  case,  Hemenway  v.  Hemenway,  134  Mass. 
446,  which  was  a  bill  for  instructions  by  trustees  under  a  will,  the 
trustees  had  bought  a  comparatively  few  railroad  bonds  at  a  small 
premium.  The  court  refused  to  lay  down  any  general  rule  which 
would  coutrol  all  cases  of  bonds  bought  at  a  premium,  but  said, 
"  The  trustee,  who  has  the  fund  always  in  his  hands  and  under  his 
eyes,  must  take  reasonable  care  to  hold  the  balance  even  between 
opposing  interests."  It  was  found  as  a  fact  in  this  case  that 
the  balance  had  been  evenly  held  between  the  persons  entitled 
to  the  income  and  those  entitled  to  the  corpus.  So  the  court  held 
that  the  fact  that  a  small  premium  was  paid  was  not  of  itself  alone 
enough  to  prevent  those  entitled  to  income  from  receiving  the  entire 
net  income. 

Hemenway  v.  Hemenway  was  not  expressly  overruled  by  New 
England  Trust  Co.  v.  Eaton,  although  the  court  had  the  case  clearly 
in  mind.  There  was  a  strong  dissenting  opinion,  concurred  in  by 
three  judges  out  of  a  total  of  seven,  upon  the  reasoning  of  Hemenway 
V.  Hemenway.  The  language  of  New  England  Trust  Co.  v.  Eaton 
was  however  very  strong :  "  There  can  ordinarily  be  no  better 
test  of  the  true  income  which  a  sum  of  money  will  produce,  having 
regard  to  the  rights  of  both  the  tenant  for  life  and  the  remainder- 
man, than  the  interest  which  can  be  received  from  a  bond  which 
sells  above  par  and  is  payable  at  the  termination  of  a  fixed  time, 
deducting  from  such  interest,  as  it  becomes  due,  such  sums  as  will 
at  maturity  efface  the  premium.  If  such  a  bond  has  increased  in 
value  since  its  purchase,  assuming  it  to  have  been  an  entirely  safe 
investment,  and  none  other  should  be  made,  it  is  because  a  change 
in  the  rates  of  interest,  or  some  similar  cause,  has  altered  market 
values ; "  per  Devens,  J. 

Under  the  circumstances  the  safe  course  for  trustees  to  follow  in 


WASTING  INVESTMENTS.  15 

Other  jurisdictions  have  held  that  no  part  of 
the  current  income  should  be  used  to  replace  a 
premium.  (Kite's  Devisees  v.  Kite's  Ex'r,  93  Ky. 
257 ;  Penn-Gaskell's  Estate  (No.  2),  208  Pa.  St.  346.) 
It  is  argued  that  gains  and  losses  in  the  value  of 
bonds  should  come  within  the  general  rule  applied 
to  other  securities :  that  they  are  gains  and  losses 
in  corpus.  It  is  pointed  out  that  premiums  are  not 
paid  to  secure  greater  income,  but  usually  represent 
safety  and  permanency  of  the  investment  and  facility 
of  transfer  and  use,  and  in  fact  usually  accompany 
a  low  rate  of  interest.  It  is  argued  that  the  premium 
is  paid  more  for  the  interest  of  the  remainderman 
than  for  the  interest  of  the  life  tenant,  and  so  should 
be  considered  as  something  that  the  fund  itself  should 
endure,  as  being  a  charge  for  the  benefit  of  the  whole 
fund.  (Penn-Gaskell's  Estate  (No.  2),  208  Pa.  St. 
346  ;  N.  E.  Trust  Co.  v.  Eaton,  140  Mass.  532,  545 
(dissenting  opinion  by  Kolmes,  J.) .) 

If  the  intention  of  the  creator  of  the  life  estate  or 
of  the  trust  estate  appears  to  have  been  that  wasting 
premiums  should  not  be  replaced  out  of  income,  of 
course  that  intention  controls.     If  the  main  object 

Massachusetts  would  seem  to  be,  to  set  aside  a  porportional  part  of 
each  interest  payment  to  replace  the  premium  paid  by  them. 

The  following  quotation  from  Loring's  "  A  Trustee's  Handbook  " 
(2d  ed.),  p.  112,  indicates  the  practice  and  opinion  of  a  Massa- 
chusetts trustee  of  large  practical  experience :  "  The  practice  of 
buying  bonds  which  sell  at  a  discount,  to  balance  those  bought  at 
a  premium,  is  not  sound,  as  the  difference  of  price  is  not  simply  a 
question  of  interest,  but  is  more  often  one  of  security,  nor  can  the 
loss  on  one  investment  be  set  off  against  the  gain  on  another." 


16  INCOME  AND   PRINCIPAL. 

of  a  testator  appears  to  have  been  to  provide  a 
liberal  income  consistent  with  safety,  the  courts  will 
incline  to  the  view  that  he  did  not  intend  any  de- 
ductions from  income  to  replace  such  loss  of  corpus. 
(Matter  of  Hoyt,  160  N.  Y.  607.)  A  direction  by  a 
testator  to  invest  in  certain  kinds  of  bonds  and  pay 
to  his  four  sons  "  all  the  dividends  and  income  "  of 
said  bonds,  over  and  above  the  expense  of  car- 
rying out  the  trust,  was  held  to  indicate  an  in- 
tention that  no  deductions  from  income  of  such 
bonds  should  be  made  to  replace  the  premiums 
which  the  trustee  was  obliged  to  pay.  (Shaw  v. 
Cordis,  143  Mass.  443.) 

Where  bonds  which  are  rated  at  a  premium  are 
part  of  the  identical  property  left  by  the  testator, 
and  the  trustees  have  properly  allowed  the  invest- 
ment to  remain,  deductions  should  not  be  made 
from  current  income  to  replace  the  wasting  pre- 
mium, unless  it  appears  that  the  testator  intended 
that  such  provision  should  be  made.  (Sargent  v. 
Sargent,  103  Mass.  297.  See  also  Eeed  v.  Head, 
6  Allen,  174.) 

Profit  on  a  Sale  of  Bonds.  If  bonds  are  sold  at  a 
larger  premium  than  was  paid  for  them,  all  of  the 
increase  belongs  to  the  principal,  and  none  of  the 
gain  can  be  said  to  be  income.  (Matter  of  Proctor, 
85  Hun,  572;  Matter  of  Gerry,  103  N.  Y.  445 ; 
Graham's  Estate,  198  Pa.  St.  216.  But  see  Park's 
Estate,  173  Pa.  St.  190.) 


CHAPTEE  III. 
DIVIDENDS  ON  SHARES  OF  Sf OCK. 

In  determining  whether  dividends  on  shares  of 
stock  in  corporations  or  joint-stock  companies  are 
income  or  are  wholly  or  partly  corpus,  the  same  gen- 
eral principle  of  preserving  the  corpus  intact  and  not 
using  it  up  as  income  applies  as  in  other  invest- 
ments. If  dividends  are  not  paid  out  of  earnings, 
but  are  really  divisions  of  the  capital  of  the  corpora- 
tion or  company  they  constitute  part  of  the  principal 
of  the  trust,  and  should  not  be  treated  as  income  in 
the  absence  of  a  contrary  intention  of  the  creator 
of  the  trust.  (Heard  v.  Eldredge,  109  Mass.  258; 
Wheeler  v.  Perry,  18  N.  H.  307 ;  Walker's  Ex'r  v. 
Walker,  68  N.  H.  407.) 

Income  of  Corporation  and  Income  of  Stockholder. 
The  profits  and  earnings  of  a  corporation  or  joint 
stock  company  are  income  of  the  corporation  or 
company  as  soon  as  they  are  made,  but  they  are  not 
income  of  the  stockholder  until  the  corporation  has 
set  them  apart  as  dividend.  (Minot  v.  Paine,  99 
Mass.  101.)  As  a  matter  of  good  business  policy  it 
is  left  very  much  to  the  discretion  of  the  officers  of 
corporations  to  determine  what  portion  of  earnings 

2 


18  INCOME   AND   PRINCIPAL. 

to  divide  among  the  stockholders,  what  portion  to 
expend  for  enlargements  of  the  working  capital,  and 
what  portion  to  accumulate  for  any  reason.  It  has 
not  been  the  policy  of  the  courts  to  interfere  with  a 
very  free  exercise  of  this  discretion  so  long  as  good 
faith  is  apparent.  In  the  exercise  of  this  discretion, 
directors  of  a  corporation  would  not  be  required  to 
consider  the  relative  rights  of  persons  entitled  to 
income  and  those  entitled  to  corpus.  (Gibbons  v. 
Mahon,136  U.  S.  549  ;  Eand  v.  Hubbell,  115  Mass. 
461 ;  Davis  v.  Jackson,  152  Mass.  58.) 

Inasmuch  as  the  officers  of  a  corporation  ordina- 
rily have  no  right  to  use  up  the  fundamental  capital 
of  the  corporation  in  dividends,  a  dividend  is  pre- 
sumed to  be  from  earnings  unless  the  contrary  is 
clearly  shown.  (Walker's  Ex'r  v.  Walker,  68  N.  H. 
407 ;  Smith  v.  Dana,  60  At.  Eep.  117  (Conn.  Mar.  9, 
1905).) 

Regular  Dividends.  This  is  especially  true  of  the 
regiilar  dividends.  For  the  purposes  of  determin- 
ing what  is  principal  and  what  income,  it  will  be 
assumed  that  the  directors  are  making  proper  pro- 
vision out  of  their  gross  income  for  the  waste  of  the 
plant  or  other  form  of  capital.  Trustees  can  there- 
fore safely  treat  regular  dividends  as  belonging  to 
income  at  the  time  when  they  are  declared,  even 
though  they  may  know  that  the  company  lost  money 
during  the  period  for  which  the  dividends  were  de- 
clared. It  is  part  of  the  business  policy  of  the  ofi&- 
cers  of  corporations  to  have  their  regular  dividends 


DIVIDENDS   ON   SHARES  OF  STOCK.  19 

uniform  in  amount.  So  they  retain  enough  of  the 
profits  of  good  years  to  make  up  the  deficiency  of 
poor  years.     (Cook  on  Corporations,  5th  ed.  §  547.) 

As  it  is  the  declaration  of  the  dividend  which 
gives  the  stockholder  a  right  to  it,  it  is  general  law 
that  the  owner  of  the  stock,  or  the  person  entitled  to 
the  income  of  the  stock  at  the  time  the  regular  divi- 
dend is  declared,  is  entitled  to  the  whole  dividend ; 
no  inquiry  is  made  as  to  when  the  earnings  were 
made  and  usually  no  attempt  is  made  to  apportion 
regular  dividends  as  to  time.  (See  authorities  infra, 
under  Apportionment  of  Current  Income.) 

Wasting  Dividends.  Where,  however,  it  is  clear 
that  tlie  regular  dividends  are  wearing  away  the 
capital  of  the  corporation,  a  trustee  would  need  to 
provide  for  a  repair  of  this  gradual  waste  of  his 
principal,  unless  a  different  intention  is  found  in  the 
instrument  creating  the  trust.  An  investment  by 
the  trustee  himself  in  stock  of  a  corporation  which 
had  a  right  so  to  waste  its  capital  would  ordinarily 
not  be  a  proper  investment.  If  the  trust  property 
comes  to  him  already  invested  in  such  stock,  and 
he  has  authority  to  continue  the  investment,  the 
chances  are  strong  that  the  creator  of  the  trust  in- 
tended the  entire  dividends  to  be  treated  as  income. 
Thus  in  the  case  of  Keed  v.  Head,  6  Allen,  174,  a 
testator  had  left  the  income  of  certain  shares  of 
stock  in  a  land  company  to  certain  persons  for  life. 
The  dividends  regularly  paid  to  the  testator  and  to 
the  life  tenants  were  partly  out  of  the  corpus.     It 


20  INCOME  AND   PRINCIPAL. 

was  held  that  the  life  tenants  were  entitled  to  the^ 
whole  dividends,  although  these  dividends  were 
wasting  the  principal,  because  this  was  evidently 
the  testator's  intention,  for  the  custom  of  the  com- 
pany during  his  lifetime  had  been  to  pay  out  in 
dividends  the  proceeds  of  property  which  consti- 
tuted capital  of  the  company. 

Extraordinary     Cash    Dividends.      Extraordinary 
dividends  present  much  more  perplexing  questions 
to  a  trustee,  and  there  is  a  hopeless  conflict  of  au- 
thority on  several  important  points  involved.     Al- 
though the  general  rule  of  preserving   the   corpus 
intact  and  of  giving  earnings  to  income  applies  in 
the  case  of  extraordinary  dividends,  a  serious  diffi- 
culty arises  from  the  fact  that  extraordinary  divi- 
dends are  not  usually  based  upon  current  earnings. 
Very  often  a  large  part  of  the  earnings  on  which 
such  a  dividend  is  based  have  been  accumulated  be- 
fore the  shares  of  stock  came  into  the  hands  of  the 
trustee,  and  were  represented  in  the  value  of  the 
shares  at  the  time  the  trustee  acquired  them. 
For  although  undivided  earnings  of  a  corporation 
t?'     are  not  the  property  of  the  stockholder  and  so  are 
-^^        not  income  as  to  him  while  they  remain  undivided,  he 
_o      A     of  course  has  an  interest  in  them,  as  he  has  in  all 
,^  -*^^       the  property  of  the  corporation.     The  existence  of 
#^  c>C*k  undivided  earnings  increases  the  value  of  each  share 

J^  of  stock,  and  for  this  reason  they  are  in  one  sense 

iijr  capital  of  the  stockholder.     (Gibbons  v.  Mahon,  136 

U.  S.  549  ;  Rand  v.  Hubbell,  115  Mass.  461 ;  Matter 


V 


DIVIDENDS   ON   SHARES  OF   STOCK.  21 

of  Kernochan,  104  N.  Y.  618  ;  Second  Universalist 
Church  V.  Colegrove,  74  Conn.  79  ;  Gifford  v.  Thomp- 
son, 115  Mass.  478 ;  Van  Doren  v.  Olden,  19  N.  J. 
Eq.  176.) 

Apportionment  of  Extraordinary  Cash  Dividends. 
This  double  nature  of  undivided  earnings  which  are 
really  income,  but  which  by  being  retained  have  in- 
creased the  value  of  the  shares  of  stock,  has  caused 
the  courts  a  great  deal  of  difficulty,  because  a  divi- 
dend out  of  accumulated  earnings  will  proportion- 
ately reduce  the  value  of  each  share  of  stock. 
Where  the  accumulation  of  income  has  been  going 
on  for  many  years,  as  is  often  the  case,  and  a  large 
extraordinary  cash  dividend  is  declared,  the  effect 
of  which  must  be  greatly  to  impair  the  value  of 
shares  of  stock,  should  such  a  dividend  be  treated 
by  a  trustee  as  income  to  be  paid  to  the  life  bene- 
ficiary ?  It  is  a  dividend  from  income  of  the  corpo- 
ration, but  at  the  same  time  it  reduces  the  value  of 
the  corpus.  To  illustrate,  assume  that  a  father  has 
left  to  trustees,  to  pay  the  income  thereof  to  his  son 
for  life,  shares  of  stock  in  a  mining  company  which 
has  for  years  been  accumulating  undivided  earn- 
ings. Partly  as  a  result  of  this  accumulation  the 
value  of  the  shares  is  about  $200.  A  year  after  the 
father's  death  the  corporation  divides  these  surplus 
earnings  in  the  form  of  a  cash  dividend  of  $75  a 
share.  The  value  of  the  shares  is  thereby  reduced 
to  $125.  Should  this  $75  a  share  be  paid  over  to 
the   son   as  income,  or  should   it  be  held  by  the 


22  INCOME   AND   PEINCIPAL. 

trustee  as  part  of  the  corpus  ?  Complicate  the  situa- 
tion somewhat  by  assuming  that  the  dividend  is 
declared  ten  years  after  the  father's  death,  and  that 
part  of  the  earnings  has  been  accumulating  during 
that  time.  Assume  still  again  that  all  of  the  ac- 
cumulation has  taken  place  after  the  father's  death, 
and  that  the  dividend  had  been  declared  the  day 
after  the  son's  death.  Should  any  part  of  the  extra 
dividend  be  paid  to  the  estate  of  the  son  during 
whose  life  it  was  earned  ? 

Massachusetts  Rule,  against  Apportionment  of  Extra 
Dividends.  It  is  not  surprising  that  widely  different 
rules  have  been  developed  by  different  jurisdictions. 
Some  jurisdictions  have  adhered  to  the  common-law 
rule  that  dividends  cannot  be  apportioned  as  to 
time.  Their  reasoning  is  that  earnings  of  a  corpora- 
tion do  not  become  income  of  the  stockholder  until 
they  are  declared  as  dividends,  and  that  there 
should  be  no  inquiry  as  to  when  the  corporation 
made  the  earnings.  They  argue  that  it  is  impracti- 
cable for  a  trustee  or  for  the  court  to  go  deeply 
enough  into  the  affairs  of  a  corporation  in  such  a 
collateral  matter,  to  determine  justly  when  the  basis 
of  the  dividend  accrued  to  the  corporation.  They 
hold  that  the  only  inquiry  should  be  whether  the 
basis  of  the  dividend  is  earnings  which  have  not 
been  actually  capitalized,  or  capital  of  the  corpora- 
tion, and  that  if  the  dividend  is  actually  from 
earnings,  it  is  the  declaration  by  the  officers  of  the 
corporation  which  makes  it  income.     (Eand  v.  Hub- 


DIVIDENDS  ON   SHARES  OF  STOCK.  23 

bell,  115  Mass.  461 ;  Minot  v.  Paine,  99  Mass.  101 ; 
Gifford  V.  Thompson,  115  Mass.  478 ;  Hemenway  v. 
Hemenway,  181  Mass.  406  ;  Adams  v.  Adams,  139 
Mass.  449,  452  ;  Kichardson  v.  Eichardson,  75  Maine, 
570;  Waterman  v.  Alden,  42  111.  App.  294;  144 
111.  90 ;  De  Koven  v.  Alsop,  205  111.  309  ;  Hite's 
Devisees  v.  Hite's  Ex'r,  93  Ky.  257 ;  Second  Uni- 
versalist  Church  v.  Colegrove,  74  Conn.  79 ;  Matter 
of  Kernochan,  104  K  Y.  618 ;  Gibbons  v.  Mahon, 
136  U.  S.  549;  see  Gen.  Statutes  Conn.  (Rev.  of 
1902),  §  377  ;  see  also  Millen  v.  Guerrard,  67  Ga. 
284.) 

It  has  also  been  held  as  a  corollary  of  this  doctrine 
that  if  a  corporation  comes  to  final  liquidation  with 
a  surplus  of  undivided  earnings  which  have  not  been 
capitalized  and  makes  a  distribution  of  the  property 
of  the  corporation  in  a  large  final  dividend  without 
a  separation  of  earnings  from  capital,  the  whole 
dividend  should  be  treated  as  belonging  to  principal, 
because  there  has  been  no  declaration  of  a  dividend 
from  earnings  as  earnings.  (Gifford  v.  Thompson, 
115  Mass.  478 ;  Second  Universalist  Church  v.  Cole- 
grove,  74  Conn.  79 ;  In  re  Armitage,  L.  R.  (1893)  3 
Ch.  337.) 

Pennsylvania  Rule  of  Apportionment  of  Eztra  Divi- 
dends. On  the  other  hand,  there  are  jurisdictions 
which  hold  just  as  firmly  that  the  trustee  or  life- 
tenant  and  the  courts  should,  in  justice  to  the  con- 
flicting interests  and  to  the  intention  of  testators 
or  other  creators  of  the  limited  estates,  apportion 


24  INCOME  AND   PRINCIPAL. 

these  extraordinary  dividends  according  to  the  time 
when  the  earnings  were  actually  made.  It  is  argued 
that  earnings  accumulated  during  the  life  of  a  tes- 
tator, or  before  the  stock  was  bought  by  a  trustee, 
are  represented  in  the  value  of  the  securities,  and  to 
give  such  a  dividend  to  income  would  seriously  im- 
pair the  corpus  of  the  estate  and  do  grave  violence 
to  the  intention  of  the  testator  and  to  the  interests 
of  the  remainderman,  and  in  many  cases  to  the  real 
interests  of  the  life  beneficiaries.  It  is  urged  with 
great  force  that  when  testators  speak  of  "  profits  and 
income  "  they  mean  only  such  as  are  made  by  the 
corporation  after  the  trust  is  established.  (Earp's 
Appeal,  28  Pa.  St.  368  ;  Smith's  Estate,  140  Pa.  St. 
344;  Van  Doren  v.  Olden,  19  N.  J.  Eq.  176 ;  Lang's 
Ex'r  V.  Lang,  56  N.  J.  Eq.  603 ;  Thomas  v.  Gregg, 
78  Md.  545  ;  Cobb  v.  Fant,  36  S.  C.  1.  See  Gen. 
Statutes  of  Conn.  (Rev.  of  1902),  §  377.  See  also 
Pritchitt  V.  Nashville  Trust  Co.,  96  Tenn.  472.)  i 

One  of  the  chief  criticisms  of  the  Pennsylvania 
rule,  as  it  is  called,  is  the  inability  to  carry  it  to  its 
logical  conclusion.  If  the  earnings  as  they  accumu- 
late belong  equitably  to  the  person  entitled  to  in- 
come, why  should  he  not  receive  part  of  the  price 
obtained  for  stock  held  during  a  period  of  accumula- 
tion and  sold  before  any  dividend  is  declared  ?  No 
court  has  yet  applied  the  rule  to  such  a  case. 
(Connolly's  Estate  (No.  1),  198  Pa.  St.  137.)    Nor 

1  In  England  the  Apportionment  Act  of  1870  requires  all  divi- 
dends of  public  companies  to  be  apportioned  as  if  they  accrued 
from  day  to  day.    (33  &  34  Vict.  c.  35.) 


DIVIDENDS  ON   SHARES  OF  STOCK.  25 

is  a  person  who  is  entitled  to  income  during  a  limited 
time  ever  given  any  part  of  either  cash  or  stock 
dividend  declared  after  his  estate  has  ceased, 
although  the  dividend  may  be  based  upon  earnings 
accumulated  during  the  time  he  was  entitled  to  in- 
come.    (Bates  V.  Mackinley,  31  Beav.  280.) 

It  must  however  be  confessed  that  the  Pennsyl- 
vania rule,  so  far  as  it  can  be  applied,  comes  nearer 
just  results  than  the  more  strictly  logical  and  more 
convenient  rule  of  the  Massachusetts  courts.  (See 
Davis  V.  Jackson,  152  Mass.  58.)  ^ 

Stock  Dividends.  Closely  akin  to  this  question, 
and  involving  to  some  extent  the  same  arguments, 
is  the  question  of  stock  dividends.  Stock  dividends 
are  dividends  in  the  form  of  new  stock  in  the  cor- 
poration issued  to  the  stockholders  because  of  an 
increase  of  the  working  capital.  The  usual  reason 
for  the  issue  of  stock  dividends  is  because  the  cor- 
poration has  increased  its  working  capital  by  the 
addition  of  undivided  earnings.  Usually  the  direc- 
tors of  a  corporation  have  the  right  to  decide  what 
part  of  the  earnings,  if  any,  they  shall  distribute, 

1  In  Qainn  v.  Safe  Deposit  &  Trust  Co.,  93  Md.  285,  a  sinking 
fund  had  been  accumulated  for  the  payment  of  certain  bonds  which 
the  company  had  secured.  The  accumulation  took  place  almost 
wholly  before  the  establishment  of  the  trust.  The  fund  being  un- 
expectedly set  free  by  the  payment  of  the  bonds  by  another  com- 
pany, a  cash  dividend  was  declared  out  of  part  of  this  fund.  It 
was  held  that  the  entire  dividend  belonged  to  current  income.  The 
accumulation  was  under  such  circumstances  that  it  could  not  in- 
crease the  value  of  the  shares  of  stock,  so  that  the  reason  for  giving 
it  to  principal  did  not  exist. 


c/- 


26  INCOME  AND   PRINCIPAL. 

what  part  they  shall  simply  accumulate  as  a  surplus 
and  what  part  they  shall  use  in  increasing  the  plant 
or  in  betterments.  If  the  actual  capital  is  increased 
out  of  earnings,  it  is  not  usually  necessary  that  new 
stock  should  be  issued  to  indicate  the  increase.  Any 
increase  in  the  property  of  the  corporation  in  what- 
ever form  would  usually  increase  proportionately 
the  value  of  the  shares  of  stock. 

Massachusetts  Rule  as  to  Stock  Dividends.  It  is 
obvious  that  a  stock  dividend  is  not  a  distribution 
by  the  corporation  of  any  of  its  tangible  property 
and  is  not  a  gain  by  the  stockholder  in  any  tangible 
property,  for  although  he  has  more  shares  of  stock 
he  has  no  greater  proportion  of  the  total  number  of 
shares.  For  this  reason  many  courts  have  held  that 
stock  dividends  are  not  income.  If  they  are  issued 
because  of  any  increase  of  value  it  is  because  of  an 
increase  in  the  capital  of  the  corporation.  It  is 
argued  that  it  is  immaterial  that  the  increase  in  the 
capital  came  out  of  earnings,  because  the  undivided 
earnings  of  the  corporation  are  not  income  of  a  stock- 
holder. It  is  further  pointed  out  that  if  the  undi- 
vided earnings  were  simply  accumulated,  whether 
capitalized  or  not,  without  any  stock  dividend,  no 
court  would  hold  that  any  part  of  the  increased 
value  of  each  share  of  stock  belonged  to  income, 
even  though  the  stock  were  sold  at  its  increased 
value  a  month  before  the  stock  dividend  was  de- 
clared. (Minot  V.  Paine,  99  Mass.  101 ;  D'Ooge  v. 
Leeds,  176   Mass.  558;  Daland  v.  Williams,  101 


DIVIDENDS  ON   SHARES  OF  STOCK.  27 

Mass.  571 ;  Adams  v.  Adams,  139  Mass.  449,  452  ; 
Rand  v.  Hubbell,  115  Mass.  461 ;  Gibbons  v.  Mahon, 
136  U.  S.  549 ;  De  Koven  v.  Alsop,  205  111.  309 ; 
Spooner  v.  Phillips,  62  Conn.  62 ;  Second  Univer- 
salist  Church  v.  Colegrove,  74  Conn.  79 ;  Richardson 
V.  Richardson,  75  Maine,  570 ;  Brown  &  Lamed, 
Petitioners,  14  R.  I.  371 ;  Greene  v.  Smith,  17  R.  I. 
28  ;  Bouch  v.  Sproule,  L.  R.  12  App.  Cas.  385.)  ^ 

1  "  Reserved  and  accumulated  earnings,  so  long  as  they  are  held 
and  invested  by  the  corporation,  being  part  of  its  corporate  prop- 
erty, it  follows  that  the  interest  therein,  represented  by  each  share, 
is  capital,  and  not  income,  of  that  share,  as  between  the  tenant  for 
life  and  the  remainderman,  legal  or  equitable,  thereof. 

Whether  the  gains  and  profits  of  a  corporation  should  be  so  in- 
vested and  apportioned  as  to  increase  the  value  of  each  share  of 
stock,  for  the  benefit  of  all  persons  interested  in  it,  either  for  a 
term  of  life  or  for  years,  or  by  way  of  remainder  in  fee  ;  or  should 
be  distributed  and  paid  out  as  income,  to  the  tenant  for  life  or  for 
years,  excluding  the  remainderman  from  any  participation  therein ; 
is  a  question  to  be  determined  by  the  action  of  the  corporation 
itself,  at  such  times  and  in  such  manner  as  the  fair  and  honest  ad- 
ministration of  its  whole  property  and  business  may  require  or  per- 
mit, and  by  a  rule  applicable  to  all  holders  of  like  shares  of  its 
stock ;  and  cannot,  without  producing  great  embarrassment  and  in- 
convenience, be  left  open  to  be  tried  and  determined  by  the  courts, 
as  often  as  it  may  be  litigated  between  persons  claiming  successive 
interests  under  a  trust  created  by  the  will  of  a  single  shareholder, 
and  by  a  distinct  and  separate  investigation,  through  a  master  in 
chancery  or  otherwise,  of  the  affairs  and  accounts  of  the  corporation, 
as  of  the  dates  when  the  provisions  of  the  will  of  that  shareholder 
take  effect,  and  with  regard  to  his  shares  only.  .  .  . 

A  stock  dividend  really  takes  nothing  from  the  property  of  the 
corporation,  and  adds  nothing  to  the  interests  of  the  shareholders. 
Its  property  is  not  diminished,  and  their  interests  are  not  increased. 
After  such  a  dividend,  as  before,  the  corporation  has  the  title  in  all 
the  corporate  property ;  the  aggregate  interests  therein  of  all  the 


28  INCOME  AND  PRINCIPAL. 

Pennsylvania    Rule  as  to  Stock    Dividends.      On 

the  other  hand  there  are  several  jurisdictions  which 
are  bound  to  the  doctrine  that  a  stock  dividend  be- 
longs to  income  in  so  far  as  it  is  based  upon  earn- 
ings accumulated  while  the  original  stock  was  part 
of  the  trust  estate.  All  of  the  jurisdictions  which 
apportion  extraordinary  cash  dividends  would  prob- 
ably apportion  stock  dividends  on  a  like  basis,  if 
they  are  based  to  any  extent  upon  earnings  made 
while  the  trust  estate  owned  the  stock. 

The  argument  is  that,  as  the  earnings  accumulate, 
the  stockholder  has  an  equitable  right  to  them  as 
income,  and  the  form  of  the  dividend  which  may 
later  be  declared  should  not  deprive  him  of  this 
right.  The  declaration  of  a  cash  dividend  gives  him 
the  actual  earnings ;  the  declaration  of  a  stock  divi- 
dend signifies  that  these  earnings  have  been  irrevo- 
cably devoted  to  capital,  and  the  new  stock  represents 
them.  The  new  stock  can  be  sold  for  approximately 
what  the  cash  dividend  would  have  amounted  to, 
and  the  transaction  of  making  a  stock  dividend  is 
not  essentially  different  from  a  declaration  of  a  cash 
dividend  and  a  sale  of  enough  new  stock  to  exactly 
use  u^  the  dividend.  It  is  further  argued  that  no 
rule  of  convenience  should  allow  the  officers  of  cor- 

shareholders  are  represented  by  the  whole  number  of  shares ;  and 
the  proportional  interest  of  each  shareholder  remains  the  same. 
The  only  change  is  in  the  evidence  which  represents  that  interest, 
the  new  shares  and  the  original  shares  together  representing  the 
same  proportional  interest  that  the  original  shares  represented  be- 
fore the  issue  of  new  ones."  Gray,  J.,  in  Gibbons  v.  Mahon,  136 
U.  S.  549,  558. 


DIVIDENDS   ON   SHARES   OF  STOCK.  29 

porations  to  determine  the  rights  of  those  entitled  to 
income  and  those  entitled  to  corpus.  (Earp's  Ap- 
peal, 28  Pa.  St.  368;  Smith's  Estate,  140  Pa.  St. 
344;  Ashhurst  v.  Field's  Adm'r,  26  N.  J.  Eq.  1,  11 ; 
Van  Doren  v.  Olden,  19  N.  J.  Eq.  176 ;  Lang's  Ex'r 
V.  Lang,  56  N.  J.  Eq.  603;  Thomas  v.  Gregg,  78 
Md.  545 ;  Pritchitt  v.  Nashville  Trust  Co.,  96  Tenn. 
472.  See  also  Cobb  v.  Fant,  36.  SCI;  Lord  v. 
Brooks,  52  N.  H.  72 ;  Peirce  v.  Burroughs,  58  N.  H. 
302.) 

Method  of  Apportionment.  The  method  of  appor- 
tionment adopted  in  Earp's  Appeal,  the  leading  case 
for  this  doctrine,  was  to  find  .the  difference  in  value 
between  the  old  stock  owned  by  the  trust  at  the 
date  when  the  trust  was  established  and  the  old 
and  the  new  stock  together  at  the  time  of  the  stock 
dividend.  The  surplus  earnings  being  left  as  large 
as  when  the  trust  began,  the  increase  in  value 
was  held  to  belong  to  income.  Thus  it  was  found 
that  the  original  540  shares  were  worth  $67,500  at 
the  time  of  the  testator's  death.  These  original 
shares  together  with  the  810  new  shares  of  the 
dividend  were  worth  $108,000  at  the  time  of  the 
stock  dividend.  The  difference,  $40,500,  represent- 
ing 506  new  shares  at  market  value,  was  held  to  be 
profit  which  arose  since  the  death  of  the  testator,  and 
was  apportioned  entirely  to  income,  since  the  stock 
dividend  did  not  reduce  the  surplus  earnings  below 
what  they  were  at  the  beginning  of  the  trust. 

This  seems  to  be  the  accepted  method  of  appor- 


30  INCOME  AND  PRINCIPAL. 

tioning  a  stock  dividend.  It  will  be  noticed  that 
only  a  part  of  the  new  shares  was  given  to  income, 
although  it  was  found  that  the  stock  dividend  was 
based  wholly  upon  earnings  made  while  the  trust 
owned  the  stock.  The  life  tenant  ought  never  to 
get  more  than  the  par  value  of  all  the  new  stock 
issued  to  his  trustee,  although  the  new  stock  is 
worth  more  than  par.  The  reason  that  it  is  worth 
more  than  par  is  usually  because  of  a  large  fund 
of  undivided  earnings  which  are  not  being  per- 
manently capitalized  and  in  which  it  has  equal 
equities  with  the  old  stock.  The  stock  dividend 
represents  a  permanent  capitalization  only  of  earn- 
ings equal  to  the  par  value  of  the  new  stock.  To 
illustrate  with  the  facts  of  Earp's  Appeal,  if  the  life 
tenant  had  been  given  the  entire  issue  of  810  shares 
which  sold  at  $80,  he  would  have  had  a  dividend 
of  $64,800  in  value.  The  original  540  shares  left 
as  principal  would  have  been  worth  only  $43,200,  a 
shrinkage  of  $24,200.  Instead,  he  was  given  enough 
of  the  new  stock  at  its  market  value  to  equal  the 
810  new  shares  at  $50,  the  par  value. 

In  making  the  apportionment  the  periodical  fiscal 
reports,  usually  semi-annual  or  annual,  of  the  cor- 
poration are  usually  taken  as  showing  when  the 
earnings  were  accumulated,  and  no  attempt  is  made 
to  apportion  for  periods  less  than  those  covered 
by  such  reports.  (Earp's  Appeal,  28  Pa.  St.  368 ; 
Thomas  v.  Gregg,  78  Md.  545.) 

New   York   Rule   as  to  Stock   Dividends.      Some 


DIVIDENDS    ON   SHARES   OF   STOCK.  31 

jurisdictions  which  have  refused  to  apportion  ex- 
traordinary dividends  give  the  entire  stock  dividend 
to  income  if  it  is  based  upon  earnings,  regardless  of 
when  the  earnings  were  accumulated.  (McLouth  v. 
Hunt,  154  K  Y.  179 ;  Lowry  v.  Farmers'  Loan  & 
Trust  Co.,  172  K  Y.  137 ;  Kite's  Devisees  v.  Kite's 
Ex'r,  93  Ky.  257 ;  see  also  Millen  v.  Guerrard,  67 
Ga.  284)1    ^^^^  ^   r^f^JUTit^t    vo*^  ^>)-^  -      4^ 

Option  to  take  Cash  or  New  Stock.  When  stock- 
holders are  given  an  option  to  take  their  dividend 
out  of  earnings  from  the  company  either  in  cash  or 
in  new  stock  of  the  same  value,  courts  which  ad- 
here to  the  Massachusetts  rule  have  held  that  the 
dividend  should  be  treated  as  a  cash  dividend  and 
should  go  to  income,  even  though  it  is  actually 
taken  in  the  form  of  new  stock.  Such  a  transaction 
is  treated  as  in  substance  the  declaration  of  a  cash 
dividend  and  a  simultaneous  sale  by  the  company 
of  new  stock.  (Davis  v.  Jackson,  152  Mass.  58 ; 
Lyman  v.  Pratt,  183  Mass.  58  ;  Waterman  v.  Alden, 
42  111.  App.  294,  144  111.  90 ;  see  also  In  re  Malam, 
L.  E.  (1894)  3  Ch.  578.)  2 

1  The  language  of  the  New  York  cases  indicates  that  the  courts 
would  probably  not  give  to  the  life  tenant  a  stock  dividend  out  of 
earnings  accumulated  mostly  during  the  life  of  a  testator,  unless 
they  found  evidences  of  intention  that  the  life  tenant  should  have 
such  a  dividend.  The  New  York  courts  have  reserved  to  them- 
selves considerable  discretion  in  applying  any  rule.  (McLouth  v. 
Hunt,  154  N.  Y.  179;  Lowry  w.  Farmers'  Loan  &  Trust  Co.,  172 
N.  Y.  137.) 

2  In  Davis  v.  Jackson,  152  Mass.  58,  the  stockholders  of  a  cor- 
poration voted  to  increase  the  capital  stock  by  1,000  shares  of  $100 


32  INCOME   AND   PRINCIPAL. 

If,  however,  this  is  simply  a  form  adopted  by  the 
corporation  of  issuing  a  stock  dividend  and  the  op- 
tion is  only  apparent,  or  if  the  choice  of  cash  in- 
volves giving  up  without  adequate  compensation  the 
right  to  subscribe  for  new  stock  at  less  than  the 
market  value,  so  that  no  prudent  man  would  avail 
himself  of  it,  Massachusetts  courts  have  held  that 

each,  and  that  each  stockholder  be  entitled  to  subscribe  for  one 
new  share  for  every  four  held  by  him.  At  a  meeting  of  the  direc- 
tors held  on  the  same  day  at  the  close  of  the  stockholders'  meeting 
an  extra  dividend  of  $25  a  share  out  of  the  earnings  was  declared. 
This  dividend  was  by  design  exactly  sufficient  to  enable  the  stock- 
holders to  pay  for  their  new  stock  if  they  wished,  but  they  were 
not  bound  to  take  new  stock,  and  could  take  the  cash  and  sell  their 
rights  to  subscribe  for  new  stock.  The  earnings  of  the  company 
were  sufficient  to  pay  the  dividend,  but  if  they  were  so  used,  then 
it  would  be  necessary  to  raise  about  an  equal  amount  to  pay  for 
additions  which  had  already  been  made  to  the  working  capital  and 
which  had  increased  its  value  at  least  twenty-five  per  cent  above  the 
par  value  of  the  old  stock.  The  directors  had  discussed  the  ques- 
tion of  a  stock  dividend  and,  with  the  understanding  that  a  stock 
dividend  was  not  permitted  by  law,  had  used  this  method  as  a 
substitute. 

Held  that  the  dividend  was  income  to  the  stockholders.  "  The 
dividend  was  declared  as  a  cash  dividend,  and  it  represented  what 
originally  at  least  were  earnings  of  the  company.  In  justice  the 
earnings  of  the  company  ought  to  go  to  the  life  tenants.  If  the  only 
thing  to  be  considered  by  tlie  corporation  was  the  relation  between 
tenants  for  life  and  remainder  men,  it  would  have  no  right  to  de- 
vote income  to  increasing  capital ;  if  it  wished  to  increase  its  plant, 
it  would  have  to  do  it  by  borrowing  money  or  by  issuing  more 
stock.  In  fact  it  has  the  right  to  appropriate  income  to  permanent 
improvements,  because  it  has  the  right  to  manage  its  affairs  in  the 
way  it  deems  best  for  them,  but  when  the  form  of  the  transaction 
has  not  that  effect  there  is  no  reason  why  courts  should  be  astute 
to  bring  it  out."     Holmes,  J.,  pp.  59,  60. 


DIVIDENDS   ON   SHARES   OF  STOCK.  33 

the  dividend  is  a  stock  dividend  and  should  belong 
to  principal.  (Daland  v.  Williams,  101  Mass.  571 ; 
Rand  v.  Hubbell,  115  Mass.  461 ;  see  also  Bouch  v. 
Sproule,  L.  R.  12  App.  Cas.  385.) 

A  division  by  the  corporation  of  its  own  old  stock, 
in  which  it  has  invested  surplus  earnings,  has  been 
held  to  be  equivalent  to  a  cash  dividend  and  to  be- 
long wholly  to  income.  (Leland  v.  Hayden,  102 
Mass.  542.)  But  if  the  corporation  has  paid  for 
such  old  stock  with  money  raised  by  an  issue  of 
bonds,  so  that  the  distribution  of  the  stock  actually 
impairs  its  fundamental  capital,  the  old  stock  should 
be  credited  to  principal.  (Gilkey  v.  Paine,  80  Maine, 
319.) 

A  dividend  in  the  form  of  interest-bearing  bonds, 
based  upon  a  fund  of  accumulated  earnings  which 
are  retained  by  the  company,  has  been  held  to  be- 
long to  the  principal  of  a  trust  fund,  because  no 
property  was  taken  out  of  the  business  or  was 
changed  in  its  relation  to  the  business.  (D'Ooge  v. 
Leeds,  176  Mass.  558  ;  see  also  Mills,  Adm'r  v.  Brit- 
ton,  64  Conn.  4.)  Followers  of  the  Pennsylvania 
rule  and  of  the  New  York  rule  would  have  given 
such  a  dividend  partly  or  wholly  to  income. 

Delayed  Dividends.  A  distinction  must  be  made 
between  extraordinary  dividends  and  large  dividends 
which  are  simply  delayed  payments  of  guaranteed 
regular  dividends.  In  Meldrin  v.  Trustees  of  Trinity 
Church,  100  Ga.  479,  lessees  of  a  railroad  agreed 
with  the  lessor  corporation  to  declare,  and  pay  to 


34  INCOME  AND  PRINCIPAL, 

the  latter's  stockholders,  semi-annual  dividends  of 
seven  per  cent,  but  for  several  years  they  failed  to 
do  it.  A  successor,  under  the  lease,  of  the  lessee 
corporation  later  paid  over  a  portion  of  these  back 
dividends.  A  life  tenant  of  stock  had  meanwhile 
died.  It  was  held  that  his  estate  was  entitled  to 
these  back  dividends  which  should  have  been  paid 
during  his  life.  The  dividends  were  not  unde- 
clared, but  were  predeclared  up  to  seven  per  cent 
by  the  contract  between  the  corporations. 

Dividends  out  of  Capital.  The  same  general  prin- 
ciples against  impairment  of  the  capital  of  the  cor- 
poration apply  to  extraordinary  dividends  as  to 
regular  dividends.  Moreover  the  courts  are  much 
less  likely  in  case  of  an  extraordinary  dividend  to 
assume  that  it  is  paid  out  of  earnings  or  profits, 
although  the  officers  of  a  corporation  will  be  allowed 
within  reasonable  limits  to  decide  what  are  earnings 
or  profits  and  what  capital.  The  vote  declaring  an 
extraordinary  dividend  usually  specifies  in  more  or 
less  definite  terms  the  source  from  which  the  divi- 
dend is  paid,  and  if  there  is  such  a  vote  the  state- 
ment therein  of  the  source  of  the  dividend  would 
seldom,  if  ever,  be  questioned  in  a  proceeding  to 
determine  whether  or  not  the  dividend  belongs  to 
principal  or  to  income. 

Meaning  of  the  "Word  Capital  Some  confusion  has 
been  caused  by  the  indefiniteness  of  the  word  cap- 
ital. Some  courts  have  used  it  to  mean  what  may 
be  called  for  the  sake  of  clearness  the  "  fundamental 


DIVIDENDS   ON   SHAKES  OF  STOCK.  35 

capital,"  including  only  so  much  of  the  property  of 
the  corporation  as  may  be  said  to  represent  the 
capital  stock,  being  the  original  investment  of  the 
stockholders  with  such  additions  from  earnings  as 
were  necessary  to  repair  waste  and  such  other  addi- 
tions to  working  capital  as  have  formed  the  basis 
for  new  issues  of  shares.  Some  opinions  have  used 
the  term  to  include  all  the  property  of  the  corpora- 
tion, whether  used  in  the  business  or  not.  Others 
include  in  capital  proper  only  such  property  of  the 
corporation  as  is  actually  used  in  the  business  of 
the  corporation :  that  is,  the  "  working  capital." 
Other  property,  made  up  of  surplus  profits  invested 
to  produce  income  outside  the  corporation's  business 
has  sometimes  been  called  "  floating  capital."  (Clark 
&  Marshall,  Private  Corporations,  VoL  II,  §  375.) 

Dividends  'which  reduce  Fundamental  Capital. 
Dividends  out  of  the  proceeds  of  fundamental  capi- 
tal, whether  on  final  liquidation  of  the  corporation's 
affairs,  or  on  a  partial  liquidation,  are  a  repayment  of 
the  original  investment  which  is  represented  by  the 
capital  stock,  and  so  belong  to  the  corpus  or  princi- 
pal of  a  trust  fund.  (Walker's  Ex'r  v.  Walker,  68 
N.  H.  407 ;  Vinton's  Appeal,  99  Pa.  St.  434 ;  Wheeler 
V.  Perry,  18  N.  H.  307;  Mercer  v.  Buchanan,  132 
Fed.  Eep.  501 ;  Heard  v.  Eldredge,  109  Mass.  258.) 

Where  a  wharf  company,  whose  regular  income 
consisted  of  rents  and  wharfage,  divided  among 
stockholders  part  of  a  sum  received  from  the  city 
for  real  estate  taken  by  right  of  eminent  domain, 


36  INCOME  AND   PRINCIPAL, 

the  dividend  was  held  to  have  been  paid  out  of  cap- 
ital and  for  that  reason  to  belong  entirely  to  principal. 
(Heard  v.  Eldredge,  109  Mass.  258.) 

It  makes  no  difference  that  the  property  sold  is 
no  longer  needed  in  the  regular  business.  If  it 
represented  fundamental  capital  the  proceeds  of  it 
are  capital,  and,  although  it  may  be  proper  for  the 
corporation  to  pay  the  proceeds  out  as  dividend, 
the  dividend  is  not  income.  (Wheeler  v.  Perry,  18 
N.  H.  307 ;  Walker's  Ex'r  v.  Walker,  68  N.  H.  407 ; 
Vinton's  Appeal,  99  Pa.  St.  434)  It  is  also  imma- 
terial that  the  value  of  the  capital  which  the  corpo- 
ration retains  is  as  large  as,  or  even  many  times 
larger  than,  the  sum  total  of  its  capital  stock  at  par. 
(Mercer  v.  Buchanan,  132  Fed.  Eep.  501 ;  Matter  of 
Rogers,  161  K  Y.  108 ;  Wheeler  v.  Perry,  18  N.  H. 
307.) 

Several  cases  have  come  before  the  courts  in 
recent  years  growing  out  of  the  frequent  mergers  of 
corporations.  It  may  be  of  profit  to  examine  briefly 
the  essential  facts  of  one  or  two  of  these  cases.  In 
Mercer  v.  Buchanan,  132  Fed,  Rep.  501,  a  corpora- 
tion, the  A.  Co.,  with  a  capital  of  $2,000,000  was 
engaged  chiefly  in  the  manufacture  of  sheet  steel. 
It  also  owned  the  stock  of  several  subsidiary  com- 
panies which  paid  dividends.  The  A.  Co.  sold  its 
sheet  steel  plant  and  one  of  the  subsidiary  com- 
panies to  the  American  Sheet  Steel  Co.  for  $6,000,000 
in  preferred  stock  of  the  latter  company,  $6,000,000 
in  common  stock  and  $1,119,000  in  cash  for  mate- 


DIVIDENDS   ON   SHARES   OF  STOCK.  37 

rial  on  hand  and  in  course  of  manufacture.  The  A. 
Co.  agreed  not  to  engage  in  the  manufacture  of 
sheet  steel  for  fifteen  years.  It  retained  several 
subsidiary  companies  and  announced  to  its  stock- 
holders its  intention  of  continuing  the  business  of 
these  companies,  and  expressed  an  expectation  of 
earning  good  profits.  Out  of  the  proceeds  of  this 
sale  a  cash  dividend  of  fifty  per  cent  was  declared, 
amounting  to  $1,000,000.  $3,000,000  of  the  preferred 
stock  of  the  American  Company,  and  $6,000,000  of 
the  common  stock  was  also  divided  up  as  dividend. 
It  was  held  that  these  dividends  were  all  paid  out 
of  the  proceeds  of  the  capital  of  the  A.  Co.  and  for 
that  reason  belonged  entirely  to  the  principal  of  the 
trust  fund. 

In  Smith  v.  Hooper,  95  Md.  16,  a  testator  had 
bequeathed  $10,000  to  a  trustee  to  pay  the  "divi- 
dends and  income  "  to  M.  for  life.  At  M.'s  request 
the  trustees  used  the  $10,000  to  purchase  the  prop- 
erty of  a  can  manufactory.  This  property  was  then 
transferred  to  a  corporation,  the  trustees  taking  300 
shares  of  stock  in  payment.  They  sold  half  of  these 
shares  for  $5,000,  and  invested  part  of  this  $5,000 
in  stock  of  another  can  company.  The  companies 
paid  large  dividends,  which  the  trustees  paid  to  M. 
as  income.  Both  corporations  were  later  absorbed 
by  the  A.  Co.,  and,  as  a  result,  the  trustees  received 
a  large  block  of  shares  in  the  A.  Co.  The  original 
trust  fund  of  $10,000  has  increased  to  a  value  of 
$158,000,  part  of  which  is  proceeds  of  stock  sold 


38  INCOME   AND  PRINCIPAL. 

and  part  of  stock  received  on  transfer  of  the  original 
stock. ,  It  was  held  that  none  of  this  increase  could 
be  called  income,  and  that  it  belonged  wholly  to  the 
corpus  of  the  estate.  Although  there  had  been  a 
large  profit,  the  profit  came  from  the  increase  in 
value  of  the  stock.  "  Increase  and  income  are  not 
synonymous  terms.  Until  detached  or  separated 
from  the  shares  whose  value  it  enhances,  increase 
forms  part  of  that  value,  and,  therefore,  part  of  the 
shares ;  and  if  it  be  part  of  the  shares  themselves, 
then,  whilst  it  may  be  'profit,  it  is  in  no  sense 
income." 

Dividends  by  Land  Companies.  Profits  accruing 
to  the  corporation  by  reason  of  the  increase  in  value 
of  the  property  in  which  its  fundamental  ca|)ital 
was  invested  are  not  income,  but  are  accretions  to 
capital,  except  in  cases  where  it  is  part  of  the  regu- 
lar business  of  the  corporation  to  make  profits  out 
of  such  investments.  Thus  a  profit  due  to  the  in- 
crease in  value  of  land  bought  by  a  manufacturing 
corporation  with  its  fundamental  capital  for  the  site 
of  part  of  its  plant  is  an  accretion  to  capital  and 
does  not  belong  to  the  income  of  shareholders  when 
paid  to  them  in  dividends.  (Wheeler  v.  Perry,  18 
N.  H.  307 ;  Smith  v.  Hooper,  95  Md.  16 ;  Mercer  v. 
Buchanan,  132  Fed.  Eep.  501.) 

But  when  trustees  hold  stock  in  a  land  company 
part  of  whose  regular  business  is  to  buy  and  sell 
land  for  a  profit,  a  dividend  based  upon  profits  due 
to  an  increase  in  valile  of  land  while  owned  by  the 


DIVIDENDS   ON   SHAKES   OF   STOCK.  39 

company  and  realized  on  a  sale  of  the  land  is  properly 
income.  Land  in  such  a  case  is  being  dealt  in  as  a 
commodity,  and  the  capital  which  should  be  kept 
intact  is  only  what  is  represented  by  the  purchase 
price  plus  the  expense  of  holding  the  land.  (Thomp- 
son's Estate,  153  Pa.  St.  332  ;  Oliver's  Estate,  136 
Pa.  St.  43.)  The  income  is  held  to  accrue  at  the 
time  the  profit  is  realized,  that  is  at  the  time  of  the 
sale.     (OHver's  Estate,  136  Pa.  St.  43.) 

Where  a  corporation,  engaged  as  a  regular  busi- 
ness in  purchasing  land,  filling  up  flats,  laying  out 
streets,  erecting,  leasing,  and  selling  warehouses,  has 
declared  a  dividend  based  partly  upon  proceeds  of 
land  sold  by  the  corporation,  the  dividend  has  been 
hel^d  to  belong  to  income,  to  which  a  life  beneficiary 
was  entitled  in  the  absence  of  any  facts  showing 
that  the  dividend  was  part  of  the  capital  of  the  cor- 
poration or  that  the  payment  impaired  or  diminished 
the  value  of  the  shares.  (Balch  v.  Hallet,  10  Gray 
402.) 

Capitalized  Earnings.  Accumulated  earnings  which 
are  made  the  basis  of  an  addition  to  the  capital  stock 
become  thereby  part  of  the  fundamental  capital  and 
cannot  thereafter  be  divided  as  income.  After  the 
new  issue  of  stock  the  property,  although  derived 
from  earnings,  represents  permanent  capital  of  the 
stockholder.  (Hemenway  v.  Hemenway,  181  Mass. 
406  ;  Smith  v.  Dana,  60  At.  Eep.  117  (Conn.  Mar.  9, 
1905).) 

Dividends  from  Floating  Capital.    Earnings  do  not 


40  INCOME  AND   PRINCIPAL. 

become  part  of  the  permanent  capital  of  the  corpora- 
tion by  simply  being  accumulated  and  even  tempo- 
rarily invested  outside  the  business  of  the  company. 
So  long  as  their  identity  is  preserved  they  constitute 
a  fund  from  which  the  directors  can  at  discretion 
declare  a  dividend  which  is  a  dividend  from  income 
of  the  corporation.  States  which  do  not  apportion 
extraordinary  dividends  would  give  such  a  dividend 
entirely  to  income.  (Matter  of  Kogers,  161  N.  Y. 
108 ;  Hemenway  v.  Hemenway,  181  Mass.  406 ;  see 
also  Quinn  v.  Safe  Deposit  &  Trust  Co.,  93  Md. 
285.) 

Where  a  company  engaged  in  the  business  of 
mining  and  selling  coal  had  accumulated  a  large 
fund  of  undivided  earnings,  part  of  which  stood  on 
its  books  as  a  "  Coal  Land  Renewal  Fund,"  and  had 
been  held  in  reserve  for  the  purpose  of  purchasing 
new  mines  as  the  old  ones  became  exhausted,  and 
part  of  which  was  simply  surplus  profits,  most  of 
which  fund  was  invested  to  produce  income  in 
stocks,  bonds,  and  other  securities,  a  large  cash  divi- 
dend based  upon  these  accumulated  earnings  was 
held  to  be  a  dividend  belonging  to  income.  (Hem- 
enway V.  Hemenway,  181  Mass.  406.)^ 

1  For  a  different  interpretation  of  the  same  facts  see  Second 
Universalist  Church  v.  Colegrove,  74  Conn.  79. 

"  It  is  no  doubt  true  that  profits  do  not  of  necessity  always  remain 
such,  and  that  they  may  be  converted  into  permanent  capital  with- 
out any  formal  action  or  declaration  on  the  part  of  the  corporation 
or  its  directors.  (Minot  v.  Paine,  99  Mass.  101.)  But  they  do  not 
become  capital  by  mere  accumulation  and  accretion  except  in 
special  cases  and  under  special  charter  provisions,  .  .  .  nor  by  the 


DIVIDENDS   ON  SHARES  OF  STOCK.  41 

Where  a  corporation  had  invested  earnings  in  the 
purchase  of  its  own  stock  held  by  a  trustee,  a  dis- 
tribution of  this  stock  to  its  shareholders  was  held 
to  be  a  dividend  of  income.  (Leland  v.  Hayden,  102 
Mass.  542.) 

Where  a  manufacturing  corporation  had  retained 
a  large  amount  of  its  earnings,  part  of  which  it  in- 
vested in  western  lands,  in  government  bonds,  and 
in  railroad  stocks,  it  was  held  that  a  large  cash  divi- 
dend based  upon  such  floating  capital  belonged  to 
income.  (Matter  of  Eogers,  161  N.  Y.  108  ;  see 
also  Stewart  v.  Phelps,  71  App.  Div.  91,  173  K  Y. 
621.) 

Dividends  out  of  Increases  to  "Working  Capital. 
It  is  a  very  common  practice  for  corporations  to 
devote  surplus  earnings  to  enlarging  and  improving 
the  working  capital  of  the  concern,  without  in- 
creasing the  capital  stock.  Does  the  investment  of 
earnings  in  the  working  capital  of  the  company 
permanently  capitalize  the  earnings,  so  that  a  subse- 

mere  lapse  of  time,  though  that  may  be  the  practical  effect  in  cases 
where  in  consequence  thereof  it  becomes  difficult  or  impossible  to 
distinguish  them  from  capital.  So  long  as  their  identity  is  pre- 
served, we  do  not  see  why  the  directors  may  not  regard  them  as 
profits  and  treat  them  accordingly.  ...  In  order  to  become  capi- 
tal they  should  be  applied,  we  think,  in  some  effectual  way  to  a 
permanent  increase  of  the  property  which  is  used  in  the  business 
of  the  corporation.  They  may  be  set  aside  as  matter  of  bookkeep- 
ing for  such  a  use,  but  until  actually  appropriated  to  that  purpose 
they  remain,  it  seems  to  us,  profits,  and  the  corporation  and  its 
directors  may  deal  with  them  as  such."  Morton,  J.,  in  Hemenway 
17.  Hemenway,  181  Mass.  406,  410. 


42  INCOME   AND   PRINCIPAL. 

qiient  cash  dividend  based  upon  them  is  a  dividend 
which  a  trustee  must  treat  as  belonging  to  principal  ? 
The  opinions  bearing  on  this  point  are  somewhat  un- 
satisfactory, because  it  is  not  always  made  clear 
just  what  the  courts  mean  by  capital.  (Clark  & 
Marshall,  Private  Corporations,  Vol.  II,  §  375.) 

On  principle  there  seems  to  be  no  reason  for  any 
distinction  between  an  extraordinary  dividend  based 
upon  earnings  which  have  been  simply  accumulated, 
or  invested  temporarily  in  securities  or  in  a  busi- 
ness which  is  not  the  business  of  the  corporation, 
and  a  dividend  based  upon  earnings  which  have 
been  put  into  the  working  capital  of  the  corporation 
but  have  been  withdrawn  without  impairing  the 
fundamental  capital.  Directors,  except  where  there 
are  special  charter  provisions  to  the  contrary,  have 
the  right  to  reconvert  into  cash  earnings  thus  put 
into  the  business,  and,  provided  such  temporary 
capital  can  still  be  identified  and  separated  from 
the  fundamental  capital,  to  distribute  the  proceeds 
among  the  shareholders,  even  where  they  are  for- 
bidden to  declare  dividends  out  of  capital 

This  view  has  been  taken  in  the  case  of  Smith  v. 
Dana,  60  At.  Kep.  117  (Conn.,  1905).  In  that 
case  the  Holyoke  Water  Power  Co.  had,  since  the 
creation  of  the  trust,  and  about  twenty  years  after  it 
was  incorporated,  taken  up  the  manufacture  and 
sale  of  electricity  as  a  side  issue,  and  liad  built  a 
plant  for  that  purpose.  After  the  company  had 
operated  the  plant  for  about  twenty  years,  the  city 


DIVIDENDS   ON   SHARES   OF   STOCK.  43 

took  it  by  right  of  eminent  domain,  paying  for  it 
$720,000.  The  actual  cost  of  the  plant  to  the  com- 
pany had  been  $245,000.  These  proceeds  were 
distributed  in  an  extraordinary  cash  dividend  of 
65  per  cent.  The  company  owned  property  worth 
$4,000,000  over  and  above  its  liabilities,  and  its 
capital  stock  was  $1,200,000.  After  the  dividend 
the  market  value  of  the  shares  fell  from  about 
$380  to  about  $320.  It  was  held  that  this  dividend 
was  a  dividend  from  income.  Although  it  was 
not  shown,  and  probably  could  not  have  been 
shown,  whether  the  plant  had  been  built  with 
funds  derived  from  earnings  or  from  the  proceeds 
of  new  stock,  the  court  took  the  view  that  a  cash 
dividend  is  income  unless  shown  to  have  been  de- 
rived from  capital.  It  was  reasoned  that  the  doc- 
trine of  "  once  capital  always  capital "  applies  only 
to  the  fundamental  capital  which  represents  the 
capital  stock.  "  Capital,  in  that  sense,  constitutes  a 
fund  so  set  apart  and  devoted  to  the  corporate  uses 
and  the  security  of  creditors  that  the  law  jealously 
guards  it  from  the  encroachment  of  directors  in  the 
declaration  of  dividends.  It  is  placed  beyond  their 
reach  for  that  purpose,  and  no  way  is  open  to  return 
it  to  the  share  owners.  Its  dedication  is  irrevoca- 
ble, and  it  must  ever  remain  a  fund  held  in  trust 
for  creditors,  unless  some  judicial  or  other  process 
authorized  by  legislation  intervene.  Of  it  it  may 
well  be  said  "  once  capital  always  capital"  It  is 
not  so  of   undistributed  profits   or  surplus  in  any 


44  INCOME   AND   PRINCIPAL. 

form.  They  may  be  effectually  dedicated  to  corpo- 
rate uses  through  the  processes  of  a  stock  dividend, 
but  until  so  dedicated  they  are  not  removed  from 
the  reach  and  control  of  directors.  The  manner  of 
utilization  may  be  changed,  investments  altered, 
permanent  property  sold  and  turned  into  cash,  and 
experimental  or  other  enterprises  abandoned,  with 
a  realization  upon  the  investments  therein,  all  at  the 
discretion  of  directors,  with  no  such  artificial  conse- 
quence that  the  assets  thus  employed  change  their 
character  as  the  result  of  the  process.  Investment 
in  permanent  works  does  not  and  ought  not  to  cap- 
italize. Directors  can,  in  their  discretion,  fairly  ex- 
ercised, withhold  profits  and  employ  them  in  the 
conduct  and  enlargement  of  the  business.  By  the 
same  right  they  ought  to  be  able  to,  and  can,  with- 
draw from  any  action  which  will  enable  the  assets 
thus  employed  to  be  returned  to  their  original 
condition,  as  funds  available  for  distribution  to 
those  to  whom  they  might  have  been  originally 
divided  as  dividends.  Capital  of  this  kind  does  not 
bear  the  perpetual  stamp  of  capital." 

The  foregoing  case  is  the  only  one  which  has 
actually  decided  the  point  involved,  but  the  lan- 
guage of  the  other  decisions  shows  it  extremely 
doubtful  if  the  case  would  be  extensively  followed. 
The  Supreme  Court  of  Massachusetts,  in  a  dictum, 
seems  of  the  opinion  that  profits  which  are  applied 
"  in  some  effectual  way  to  a  permanent  increase  of 
the  property  which  is  used  in  the  business  of  the 


DIVIDENDS   ON   SHARES  OF  STOCK.  45 

corporation"  are  thereby  permanently  capitalized, 
and  the  court  felt  it  necessary  to  distinguish  be- 
tween profits  thus  capitalized,  and  profits  held  as  a 
"floating  capital"  (Hemenway  v.  Hemenway,  181 
Mass.  406,  411).  A  dictum  in  the  English  case 
of  Bouch  V.  Sproule,  L.  K.  12  App.  Cas.  385,  402, 
by  Lord.  Watson,  seems  to  give  some  countenance 
to  the  rule  of  the  Connecticut  decision. 

Jurisdictions  which  apportion  extraordinary  cash 
dividends  out  of  accumulated  income  would  proba- 
bly not  distinguish  between  such  a  dividend  and  a 
dividend  from  floating  capital. 

It  is  possible  that  the  Massachusetts  court  and 
those  that  adhere  to  the  Massachusetts  rule  will 
distinguish,  on  the  ground  of  intention  of  the  crea- 
tor of  the  trust,  between  earnings  thus  temporarily 
capitalized  before  the  trust  was  established,  or  be- 
fore the  stock  was  acquired  by  the  trust  estate,  and 
earnings  temporarily  capitalized  during  the  time  the 
stock  is  held  by  the  trust  estate  or  during  the  life 
estate.  It  is  going  very  far  to  hold  that  the  creator 
of  a  trust  or  of  a  life  estate  could  have  intended 
that  income  should  include  the  proceeds  of  any  con- 
siderable part  of  what  was  being  used  as  working 
capital  at  the  time  such  estate  was  created. 

Dividends  in  Liquidation.  In  jurisdictions  which 
hold  that  it  is  the  declaration  of  the  dividend  from 
income  of  the  corporation  which  makes  it  income  of 
the  stockholders,  a  division  in  liquidation  of  the 
property  of  the  corporation  without  any  separation 


46  INCOME  AND  PRINCIPAL. 

by  the  corporation  of  capital  from  income  belongs 
entirely  to  principal,  even  though  a  large  part  of  the 
assets  consisted  of  accumulated  earnings  in  the  form 
of  floating  capital.  (Gifford  v.  Thompson,  115  Mass. 
478 ;  Second  Uuiversalist  Church  v.  Colegrove,  74 
Conn.  79 ;  In  re  Armitage,  (1893),  3  Ch.  337  ;  see 
Hemenway  v.  Hemenway,  181  Mass.  406.) 

New  York  Rule.  But  the  courts  of  New  York 
will  in  such  a  case  give  to  income  so  much  of  the 
final  dividend  as  is  based  upon  accumulated  earn- 
ings which  have  not  been  put  into  the  working 
capital  of  the  corporation.  That  is,  if  the  directors 
do  not  separate  income  from  capital,  the  court  will. 
(Matter  of  Rogers,  161  K  Y.  108.)  In  the  last 
cited  case  accumulated  earnings,  which  had  been 
put  into  the  working  capital,  including  cash  kept  on 
hand  to  pay  the  wages  of  employees  and  buy  new 
material,  were  treated  as  part  of  the  capital. 

Rights  belong  to  Principal.  Rights  given  to  stock- 
holders to  subscribe  for  new  stock  at  par  when  the 
stock  is  worth  more  than  par  belong  to  the  principal 
of  the  investment,  and  if  they  are  sold  the  proceeds 
also  belong  to  the  principal.  Rights,  although  valu- 
able, are  not  dividends,  and  the  gain  from  a  sale  of 
rights  will  usually  be  exactly  balanced  by  a  loss  in 
value  of  the  old  shares.  (Atkins  v.  Albree,  12  Allen, 
359 ;  Moss's  Appeal,  83  Pa.  St.  264 ;  Riddle's  Ap- 
peal, 99  Pa.  St.  278;  Greene  v.  Smith,  17  R.  I. 
28 ;  Peirce  v.  Burroughs,  58  N.  H.  302 ;  Brinley  v. 
Grou,  5Q  Conn.  66 ;  De  Koven  v.  Alsop,  205  111. 


DIVIDENDS  ON  SHARES  OF  STOCK.       47 

309 ;  Kite's  Devisees  v.  Hite's  Ex'r,  93  Ky.  257 ; 
Eisner's  Appeal,  175  Pa.  St.  143.  But  see  contra, 
Wiltbank's  Appeal,  64  Pa.  St.  256.) 

This  rule  is  not  inconsistent  with  the  doctrine 
that  stock  dividends  founded  upon  earnings  belong 
to  income,  because,  although  the  rights  may  be 
valuable  on  account  of  an  accumulation  of  surplus 
earnings,  the  issue  of  the  new  stock  for  which  the 
par  value  is  paid  does  not  represent  a  division  of 
these  earnings.  The  issue  of  new  stock  simply  in- 
creases the  number  of  shares  that  are  entitled  at 
some  time  to  a  division  of  the  earnings.  (Moss's 
Appeal,  83  Pa.  St.  264.)  i 

Sammary.  It  is  apparent  from  the  foregoing  state- 
ment of  the  law  that  when  a  dividend  is  paid  to  a 
life  tenant  or  to  a  trustee  who  has  the  duty  of  keep- 
ing income  separate  from  corpus,  two  principal  in- 
quiries are  necessary.  First,  Is  the  dividend  paid  out 
of  what  is  income  of  the  corporation,  or  is  it  a  dis- 
tribution of  what  is  capital  of  the  corporation  ?     If 

1  The  Pennsylvania  courts  seem  to  have  limited  this  rule  to 
cases  where  the  new  stock  is  of  the  same  company  as  that  of  which 
the  trustees  hold  stock.  In  Eisner's  Appeal,  175  Pa.  St.  143,  it 
was  held  that  valuable  rights  given  to  stockholders  of  F.  Co.  to 
subscribe  to  new  stock  in  E.  Co.  could  not  impair  the  value  of 
stock  in  the  F.  Co.  held  by  the  trustees,  and  so  were  income.  (But 
see  Thomson's  Estate,  153  Pa.  St.  332.) 

It  would  seem  that  Pennsylvania  courts,  and  those  which  follow 
the  Pennsylvania  rule  of  giving  stock  dividends  to  income  when 
based  upon  earnings  made  while  the  principal  shares  belonged  to 
the  trust,  ought  to  inquire  whether  such  rights  are  earnings  or 
accretions  to  capital  of  the  principal  corporations. 


4S  INCOME  AND   PRINCIPAL. 

the  dividend  is  found  to  have  been  paid  out  of  what 
the  corporation  was  entitled  to  treat  as  income,  no 
further  inquiry  would  usually  be  necessary  in  case 
of  a  regular  dividend.  In  case  of  an  extraordinary 
dividend,  the  form  of  the  second  inquiry  differs  in 
different  jurisdictions.  Under  the  Massachusetts 
rule  the  only  question  would  be  whether  the  dividend 
was  in  substance  a  cash  dividend  or  a  stock  divi- 
dend. Under  the  Pennsylvania  rule  the  inquiry 
must  be,  what  part  of  the  dividend  was  earned  while 
the  trust  has  owned  the  stock  or  while  the  stock 
has  belonged  to  the  life  estate. 

In  determining  the  answer  to  the  first  question 
there  is  a  presumption  that  the  dividend  came  out 
of  the  corporation's  earnings,  and  the  officers  of 
a  corporation  are,  especially  for  the  purposes  of 
such  a  collateral  inquiry,  allowed  great  freedom  in 
determining  what  increase  of  property  should  be 
treated  as  earnings  and  what  should  be  treated  as 
accretions  to  the  value  of  the  property,  which  con- 
stitutes fundamental  capital.  In  the  case  of  regular 
dividends  a  trustee  is  safe  in  relying  on  the  natural 
presumption  that  they  are  being  paid  out  of  the 
corporation's  earnings.  The  vote  declaring  extraor- 
dinary dividends  often  states  their  source  with  some 
particularity.  In  such  a  case  the  trustee  or  life 
tenant  must  determine  for  himself  whether  what  it 
stated  to  be  the  source  was  income  of  the  corpora- 
tion or  part  of  its  principal  property. 


DIVIDENDS  ON  SHARES  OF  STOCK.       49 

It  has  been  found  convenient  in  discussing  in 
detail  the  law  bearing  on  these  two  questions 
to  reverse  somewhat  the  logical  order  and  to 
deal  with  the  second  question  before  disposing  of 
the  first. 


CHAPTER  IV. 
APPORTIONMENT  OF  LOSS  OR  PROFIT. 

It  is  a  general  principle  universally  recognized 
that  loss  of  principal  of  an  investment  falls  upon 
the  corpus,  that  loss  of  income  falls  upon  the  life 
beneficiary,  and  that  each  investment  stands  by  it- 
self. It  sometimes  happens  that  there  is  an  entire 
suspension  for  a  time  of  income  upon  an  investment 
because  of  somebody's  default,  and  a  subsequent  re- 
covery of  an  amount  not  sufficient  to  repay  the  en- 
tire principal  and  overdue  income  of  the  investment. 
In  such  a  case  it  may  be  necessary  to  apportion  the 
loss  between  the  principal  and  income. 

Apportionment  of  Loss  on  Foreclosure  of  Mort- 
gage. A  common  case  of  this  sort  is  where  a  trus- 
tee has  invested  in  an  interest-bearing  mortgage  and 
has  been  obliged  to  foreclose  for  non-payment  of  in- 
terest. He  may  be  obliged  to  buy  in  the  property 
and  hold  it  for  some  time,  not  as  an  investment,  but 
for  the  purpose  of  awaiting  an  advantageous  sale, 
often  without  any  income  or  with  very  little  above 
the  expense  of  holding  the  property,  and  even  then 
be  obliged  to  sell  at  a  sum  insufficient  to  replace  the 
original  investment  and  the  accrued  interest.  For  ex- 


APPORTIONMENT   OF   LOSS  OR  PROFIT.  51 

ample,  take  the  actual  case  of  Trenton  Trust  &  Safe 
Deposit  Co.  V.  Donnelly,  55  At.  Rep.  93  (N.  J.  Ch. 
1903).  Trustees  invested  a  trust  fund  of  $20,000  in 
a  mortgage.  Interest  was  paid  up  to  October  4, 1898, 
and  turned  over  to  the  life  beneficiary.  No  interest 
was  paid  after  that  date.  The  trustees  foreclosed 
October  4,  1899,  and  bought  in  the  property,  but 
sold  it  fifteen  days  later  for  $14,200,  net,  after  de- 
ducting expenses  of  sale.  The  accrued  interest  on 
the  date  of  sale  amounted  to  $1,144.  There  was, 
therefore,  a  loss  to  the  estate  of  $6,944,  principal  and 
interest,  which  occurred  some  time  between  October 
4,  1898,  and  October  16,  1899.  It  was  held  that  it 
would  be  unjust  to  give  to  income  none  of  the  sum 
finally  recovered,  since  the  property  was  security  for 
both  principal  and  income  of  the  investment,  and, 
on  the  other  hand,  it  would  be  unjust  to  allow  to 
income  the  full  amount  of  accrued  interest  and 
throw  all  of  the  loss  on  the  principal.  The  loss  was 
accordingly  apportioned  in  proportion  to  the  com- 
parative size  of  the  original  investment,  $20,000,  and 
the  unpaid  interest  at  the  date  of  the  sale.  The 
method  employed  was  to  allow  to  principal  the  pro- 
portion of  $14,200  that  $20,000  bears  to  $21,144, 
leaving  to  income  the  proportion  that  $1,144  bears 
to  $21,144.  The  result  is  the  same  as  finding  what 
sum  invested  at  the  rate  of  interest  named  in  the 
mortgage  would,  when  added  to  the  interest  for  the 
time  elapsed,  amount  to  what  was  finally  recovered. 
Two  other  cases  in  New  Jersey  and  one  case  in 


52  INCOME   AND   PRINCIPAL. 

Netv  York  have  worked  out  the  same  result  from  a 
similar  state  of  facts.  (Hagan  v.  Piatt,  48  N.  J.  Eq. 
206;  Tuttle's  Case,  49  N.  J.  Eq.  259;  Meldon  v. 
Devlin,  31  App.  Div.  (N.  Y.)  146.  See  also  In  re 
Hubbuck,  Hart  v.  Stone  (1896),  1  Ch.  754.)  i 

Apportionment  of  Profit  realized  on  Foreclosure. 
A  similar  situation  arises  where,  after  buying  in  on 
foreclosure  and  holding  for  some  time,  the  trustees 
have  realized  a  profit  over  the  original  investment 
and  the  accrued  interest.  On  the  principle  of  the 
cases  already  cited,  it  has  been  held  that  the  profit 
should  be  apportioned  between  principal  and  income 
in  the  same  manner  that  a  loss  has  been  apportioned. 
"  The  consideration  which  seems  to  control  is  that 
the  property  purchased  represents  both  principal 
and  interest,  and  its  growth  in  value  is  due  to  both 
sources."     (Parker  v.  Seeley,  56  N.  J.  Eq.  110.)  ^ 

If,  however,  trustees  buy  in  property  in  order  to 
protect  an  investment,  but  without  in  any  way  in- 
vesting income  in  it,  and  a  profit  is  realized  on  a 

1  In  the  Massachusetts  case  of  Parsons  v.  Winslow,  16  Mass. 
361,  on  a  slightly  different  state  of  facts  the  court  used  the  same 
reasoning  and  arrived  at  a  similar  result ;  and  the  same  method  of 
apportionment  has  been  used  in  cases  of  delayed  conversion  of  the  es- 
tate into  the  authorized  investments.  ( See  cases  cited  post,  page  57.) 
But  the  case  of  Stone  v.  Littlefield,  151  Mass.  485,  where  the  facts 
seem  exactly  parallel,  apparently  gave  nothing  of  what  was  finally 
recovered  to  income.  The  point  seems,  however,  not  to  have  been 
raised  in  the  case. 

2  See,  contra,  Park's  Estate,  173  Pa.  St.  190,  which  maybe  recon- 
ciled on  the  interpretation  given  to  testator's  intention  that  profits 
should  be  paid  to  life  tenant. 


APPORTIONMENT   OF  LOSS   OR  PROFIT.  53 

subsequent  sale,  there  seems  to  be  no  reason  for  giv- 
ing any  part  of  the  profit  to  income.  It  has  been 
held  in  such  a  case  that  the  entire  profit  belongs  to 
principal.  (Neel's  Estate  (No.  2),  207  Pa.  St.  446.) 
A  similar  question  may  arise  when  a  trustee,  hav- 
ing lost  part  of  the  principal  and  income  of  a  trust 
fund  by  reason  of  an  unwarranted  investment,  and 
having  been  ordered  to  pay  to  the  new  trustee  the 
amount  of  the  loss,  is  able  to  pay  only  part  of  what 
is  adjudged  to  be  due  from  him.  The  deficiency 
has  been  apportioned  between  principal  and  income 
in  the  same  manner  as  in  Trenton  Trust  &  Safe 
Deposit  Co.  V.  Donnelly  (Parsons  v.  Winslow,  16 
Mass.  361.)^ 

1  But  see  Cook  v.  Lowry,  95  N.  Y.  103,  where  it  was  held  that 
in  case  of  devastavit  by  a  trustee,  it  will  be  presumed,  in  absence  of 
evidence  to  the  contrary,  that  the  trustee  used  up  the  income  first 
before  using  the  principal,  because  the  depletion  of  an  estate  is 
ordinarily  a  gradual  process  and  begins  by  misappropriation  of 
that  which  would  be  least  likely  to  attract  attention.  No  appor- 
tionment of  the  loss  was  made.  It  is  doubtful  if  this  case  would  be 
followed  in  other  states. 


CHAPTEE  V. 
WHEN  ENJOYMENT  OF  INCOME  BEGINS. 

It  is  universal  law  that  if  an  annuity  or  the  use 
or  income  of  property  is  given  by  will  to  a  person 
for  life  or  until  the  happening  of   a  contingency 
such  person  is  entitled  to  the  income  from  the  date 
of  the   testator's   death   unless   the   will  provides 
otherwise.     (Sargent   v.  Sargent,   103   Mass.   297 
Ayer  v.  Ayer,  128   Mass.  575 ;  Eev.  Laws   Mass 
(1902),  ch.  141,  §  24;  California  Civil  Code  (1903) 
§§  1366,  1368;   Weld  v.  Putnam,  70  Maine,  209 
Clifford  V.  Davis,  22  111.  App.   316;  Wethered   v. 
Safe  Dep.  &  Trust  Co.,  79  Md.  153 ;  Eichelberger's 
Estate,  170  Pa.  St.  242  ;  Flickwir's  Estate,  136  Pa 
St.  374.) 

Any  income  which  accumulates  in  the  hands  of 
executors  before  the  principal  is  turned  over  to 
trustees  should  be  treated  by  the  trustees  as  income 
and  be  divided  among  the  life  tenants.  (Cushing  v. 
Burrell,  137  Mass.  21 ;  Smith  v.  Fellows,  131  Mass. 
20.)  And  if  for  any  reason  the  income  has  mean- 
time been  invested,  its  earnings  also  belong  to  the 
life  tenant.     (Levering  v.  Minot,  9  Cush.  151.) 

If,  however,  it  appears  to  have  been  the  testator's 
intention  that  the  enjoyment  of  the  income  should 


WHEN  ENJOYMENT  OF  INCOME  BEGINS.  55 

not  begin  until  some  time  after  his  death,  his  inten- 
tion will,  of  course,  prevail,  and  income  in  the  mean- 
time will  become  part  of  the  principal,  unless  some 
other  provision  were  made  in  the  will.  (Keith  v. 
Copeland,  138  Mass.  303.) 

Income  in  Case  of  Delayed  Conversion.  When 
property  comes  to  a  trustee  or  executor  invested  in 
a  manner  which  he  cannot  properly  continue  perma- 
nently, either  because  of  some  direction  in  the  will 
or  deed  creating  the  trust,  or  because  the  investment 
is  not  a  proper  investment  for  a  trustee,  the  prop- 
erty must  be  turned  as  soon  as  possible  into  au- 
thorized investments.  Circumstances  must  often 
cause  considerable  delay  in  such  conversion,  and 
the  income  from  the  property  in  the  meantime  may 
be  very  different  in  amount  from  what  can  be  real- 
ized from  the  property  after  it  is  properly  invested. 
It  is  settled  law  that  in  such  a  case  the  persons 
entitled  to  income  are  not  entitled  to  the  entire 
actual  income  if  that  is  appreciably  larger  than  what 
the  property,  permanently  invested  as  directed,  would 
produce,  unless  it  clearly  appears  to  have  been  the 
intention  of  the  creator  of  the  trust  that  the  entire 
actual  income  should  be  paid  over  as  income.  (Kin- 
month  V.  Brigham,  5  Allen,  270 ;  Westcott  v.  Nick- 
erson,  120  Mass.  410 ;  Minot  v.  Thompson,  106  Mass. 
583;  Mudge  v.  Parker,  139  Mass.  153;  Healey  v. 
Toppan,  45  N.  H.  243;  Willard's  Ex'r  v.  Willard, 
21  At.  Eep.  463  (N.  J.  Ch.  1891).) 

The  converse  of  the  proposition  seems  also  to  be 


56  INCOME  AND   PRINCIPAL. 

general  law :  that  is,  if  the  property  before  conver- 
sion produce  less  income  than  might  reasonably  be 
expected  from  the  authorized  investments,  the  defi- 
ciency should  be  made  up  out  of  the  proceeds  of  the 
property.  (Edwards  v.  Edwards,  183  Mass.  581 ; 
Underbill,  Trusts,  Am.  Ed.,  p.  244.) 

Method  of  determining  Amount  of  Income.  Whe- 
ther part  of  the  actual  income  is  given  to  the  corpus 
or  part  of  the  actual  corpus  is  treated  as  equitable 
income,  the  method  of  apportionment  is  in  substance 
as  follows :  Treat  the  entire  net  proceeds  of  the  in- 
vestment in  question,  including  the  actual  net 
income  from  the  beginning  of  the  trust  to  the  time 
of  conversion,  as  the  sum  total  of  the  principal  and 
income  of  a  fund  invested  at  the  date  of  the  begin- 
ning of  the  trust  in  the  authorized  investments, 
allowing  a  rate  of  income  which  the  trustee  could 
reasonably  have  expected  from  an  authorized 
investment. 

To  illustrate,  suppose  trust  property  retained  for 
a  year  in  a  business  yielding  a  net  income  of  $5,000. 
On  conversion  into  cash  the  investment  yields  $50,- 
000.  Assuming  that  the  investments  authorized  by 
the  trust  might  reasonably  have  been  expected  to 
yield  4  per  cent  net  income,  the  amount  of  the  $55,- 
000,  the  entire  net  proceeds  to  be  retained  as  princi- 
pal may  be  found  by  dividing  $55,000  by  $1.04. 
The  result  gives  $52,884.61  as  the  permanent  prin- 
cipal and  $2,115.39  to  income,  the  income  being 
exactly  4  per  cent  of  the  permanent  principal.     If 


WHEN  ENJOYMENT  OF  INCOME  BEGINS.  57 

the  period  covered  is  more  than  a  year,  compound 
interest  with  annual  rests  should  be  allowed  to  in- 
come. For  example,  in  the  case  supposed,  the  divi- 
sor for  a  period  of  two  years  would  be  $1.0816. 
(Westcott  V.  Nickerson,  120  Mass.  410 ;  Edwards  v. 
Edwards,  183  Mass.  581,  584;  Kinmonth  v.  Brig- 
ham,  5  Allen,  270.) 

Common  situations  where  this  doctrine  would  be 
applied  are  where  part  of  a  testator's  property  comes 
to  a  trustee  tied  up  in  a  partnership  venture  from 
which  it  can  not  be  at  once  withdrawn  (Kinmonth 
V.  Brigham,  5  Allen,  270 ;  Westcott  v.  Nickerson,  120 
Mass.  410 ;  Mudge  v.  Parker,  139  Mass.  153 ;  Wil- 
lard's  Ex'r  v.  Willard,  21  At.  Kep.  463  (N.  J.  Ch. 
1891)) ;  or  in  shipping  (Healey  v.  Toppan,  45  N.  H. 
243 ;  Brown  v.  Gellatly,  L.  E.  2  Ch.  751) ;  or  in 
vacant  land  which  produces  little  or  no  income. 
(Edwards  v.  Edwards,  183  Mass.  581);  or  in  leasehold 
property  (Minot  v.  Thompson,  106  Mass.  583).  ^ 

1  In  Edwards  v.  Edwards,  cited  abore,  the  tmstees,  who  had 
been  instrncted  bj  the  will  to  invest  in  snch  secarities  as  the  laws 
of  Massachusetts  allow  savings  banks  to  invest  in,  and  pay  the  in- 
come to  testator's  widow,  held  for  three  years  a  tract  of  vacant  land, 
which  came  to  them  from  the  testator  and  which  did  not  produce 
enough  income  to  pay  taxes.  At  the  time  of  testator's  death  the 
land  was  appraised  at  $150,000;  the  trustees  sold  it  for  $196,500. 
It  was  held  that  the  net  proceeds  of  the  land,  after  deducting  taxes 
and  other  expenses,  should  be  apportioned  between  principal  and 
income.  The  court  ordered  the  case  sent  to  a  master  to  determine 
what  rate  of  income  the  trustees  could  reasonably  have  obtained  if 
the  property  had  been  invested  in  securities  authorized  by  the  will, 
declining  to  allow  the  legal  rate  of  6  per  cent.  The  decree  finally 
entered  by  agreement  of  parties  apportioned  the  income  at  the  rate 
of  4  per  cent  per  annum,  with  annual  rests. 


58  INCOME  AND   PRINCIPAL. 

Doctrine  modified  by  Testator's  Intention.  This 
doctriue  is  founded  upon  the  presumed  intention  of 
the  creator  of  the  trust  or  life  estate  that  income 
should  begin  at  once,  and  that  income  should  mean 
the  income  of  the  property  in  its  converted  state. 
When  it  appears  that  the  creator  of  the  trust  in- 
tended that  until  the  property  was  converted  the 
actual  income,  and  that  only,  should  belong  to  the 
life  beneficiary,  of  course  his  intention  will  control. 
It  is  considered  a  strong  indication  that  the  testator 
intended  the  entire  net  profits,  or  only  the  actual 
income  of  an  investment,  to  be  paid  to  the  life 
tenant,  if  he  has  expressly  given  his  trustees  power 
to  continue  the  investment  indefinitely  at  their  dis- 
cretion. (Green  v.  Crapo,  181  Mass.  55 ;  Kite's 
Devisees  v.  Kite's  Ex'r,  93  Ky.  257;  Buckingham  v. 
Morrison,  136  111.  437 ;  Keighe  v.  Littig,  63  Md.  301 ; 
Outcalt  V.  Appleby,  36  N.  J.  Eq.  73 ;  In  re  Pitcaim, 
Brandreth  v.  Colvin  (1896),  2  Ch.  199.) 

In  Buckingham  v.  Morrison,  136  111.  437,  where 
trustees  had  been  expressly  given  power  by  the  will 
to  continue  to  carry  on  indefinitely  any  business  in 
which  the  testator  might  be  engaged,  it  was  held 
that  profits  derived  from  a  business  carried  on  by  the 
trustees  until  an  opportunity  for  conversion  consti- 
tuted income  of  the  trust  estate.  In  Kite's  Devi- 
sees V.  Kite's  Ex'r,  93  Ky.  257,  where  trustees,  who 
had  been  instructed  to  manage,  control,  invest,  and 
dispose  of  the  estate  "  in  their  discretion,  so  as  to  be 
safe  and  produce  income,"  held  unproductive  real 
estate  awaiting  a  better  price,  it  was  decided  that 


WHEN  ENJOYMENT   OF  INCOME   BEGINS.  69 

only  actual  income  belonged  to  the  life  tenant,  be- 
cause the  testator  must  have  known  that  it  would  be 
necessary  for  the  trustees  to  hold  part  of  the  land 
for  some  time,  and  there  was  nothing  in  the  will  to 
indicate  that  he  intended  the  life  tenant  to  have  any- 
thing more  than  actual  income. 

Disposition  of  Accumulated  Income.  Giving  prop- 
erty in  trust  necessarily  implies  that  any  income  in 
excess  of  the  sums  the  trustees  are  directed  to  pay 
out  must  be  accumulated  until  the  division  of  the 
estate  and  added  to  the  sum  to  be  finally  divided. 
Such  accumulations  become  permanently  part  of  the 
principal.  (Brown  v.  Wright,  168  Mass.  506 ;  Minot 
V.  Tappan,  127  Mass.  333.)  But  income  which  the 
trustees  have  the  right  to  hold  back  temporarily 
remains  income,  although  retained  and  accumu- 
lated for  some  time.  (Burt  v.  Gill,  89  Md.  145 ; 
Williams  v.  Bradley,  3  Allen,  270.) 

In  cases  where  trustees  are  directed  to  pay  to  the 
life  tenant  so  much  of  the  income  as  may  be  neces- 
sary for  his  support,  or  so  much  as  they  may  deem 
expedient,  and  no  specific  provision  is  made  for  dis- 
position of  accumulated  income,  it  is  a  question  of 
interpretation  of  the  testator's  intention  whether  the 
accumulated  income  has  become  part  of  the  princi- 
pal or  is  to  be  distributed  to  those  who  are  entitled 
to  income.  The  courts  favor  a  life  tenant  where  he 
is  a  near  relative  and  seems  to  have  been  the  main 
object  of  the  testator's  bounty.  (Burt  v.  Gill,  89 
Md.  145;  Williams  v.  Bradley,  3  Allen,  270.) 


CHAPTER  VI. 
OUTLAY. 

A  LIFE  tenant  of  property  must  bear  the  ordinary 
expense  of  keeping  the  property  intact  for  the  re- 
mainderman. He  must  not  only  not  commit  waste 
himself,  but  must  guard  against  ordinary  wear  and 
tear  incident  to  use.  (Plympton  v.  Boston  Dispen- 
sary, 106  Mass.  544.)  Similarly  a  trustee  must  pay 
out  of  income  these  ordinary  expenses  of  keeping 
the  property  up  and  the  expenses  of  management, 
unless  a  different  intention  has  been  shown  by  the 
creator  of  the  trust.     (Cases  cited,  infra.) 

Taxes.  A  life  tenant  enjoying  the  income  of  prop- 
erty must  keep  it  free  from  incumbrance  by  paying 
the  ordinary  yearly  taxes,  and  a  trustee  must  pay 
such  taxes  out  of  income  of  the  property  taxed. 
(Varney  v.  Stevens,  22  Maine,  331 ;  Cairns  v.  Cha- 
bert,  3  Edw.  Ch.  312 ;  DeWitt  v.  Cooper,  18  Hun, 
67 ;  Peirce  v.  Burroughs,  58  N.  H.  302 ;  Bridge  v. 
Bridge,  146  Mass.  373 ;  Holmes  v.  Taber,  9  Allen, 
246 ;  Dufford  v.  Smith,  46  N.  J.  Eq.  216 ;  Matter  of 
Tracy,  87  App.  Div.  (N.  Y.)  215,  218 ;  Hagan  v. 
Varney,  147  Til.  281.) 

TWater  Rates.  The  same  is  true  of  water  rates. 
(Bridge  v.  Bridge,  146  Mass.  373.) 


OUTLAY. 


+ 


Taxes  not  apportioned  as  to  Time.  It  has  been 
held  that  an  annual  tax  assessed  on  trust  property 
on  May  first  for  the  year  following  is  payable  out  of 
income  of  a  life  beneficiary  who  died  before  the  end 
of  the  year,  and  is  not  apportionable.  (Holmes  v. 
Taber,  9  Allen,  246.)  But  it  is  evidently  the  prac- 
tice in  Pennsylvania  to  apportion  the  tax  in  such 
cases.     (Crump's  Estate,  13  Pa.  Co.  Ct.  E.  286.) 

Taxes  assessed  on  an  estate  before  the  death  of  a 
testator  constitute  a  debt  of  his  estate,  and  are  pay- 
able out  of  the  corpus  of  his  estate,  even  though 
they  are  for  a  period  which  begins  only  a  few  days 
before  his  death.  (Matter  of  Babcock,  52  Hun, 
142.) 

Special  Taxes  for  Permanent  Improvements  ap- 
portioned. Taxes  assessed  because  of  betterments 
in  the  form  of  permanent  improvements  in  the 
locality  or  in  the  property  itself,  such  as  laying 
out  a  new  street  or  putting  in  a  sewer,  must  be 
borne  by  both  life  tenant  and  remainderman.  In 
case  of  a  life  estate,  theoretically  such  a  tax  should 
be  paid  by  the  remainderman,  and  the  life  tenant 
should  then  pay  him  interest  each  year  on  the  tax. 
In  practice  the  matter  is  adjusted  by  charging  to 
the  life  tenant  the  present  worth  of  an  annuity 
equal  to  the  annual  interest  running  during  the 
number  of  years  which  constitute  the  expectancy 
of  life  of  the  life  tenant  as  figured  by  the  life  in- 
surance tables ;  the  balance  must  be  borne  by  the 
remainderman.      (Moore  v.  Simonson,  27  Or.  117; 


62  INCOME   AND   PRINCIPAL. 

Plympton  v.  Boston  Dispensary,  106  Mass.  544; 
Estate  of  Miller,  1  Tuck.  (N.  Y.  Sur.)  346.) 

Where  such  a  tax  is  assessed  upon  a  trust  estate, 
the  trustee  has  simply  to  pay  the  whole  tax  out  of 
the  principal  in  which  both  life  tenant  and  remain- 
derman are  interested.  (Plympton  v.  Boston  Dis- 
pensary, 106  Mass.  544.) 

Taxes  for  Lasting  Improvements.  Taxes  assessed 
because  of  lasting  improvements,  which  are  likely, 
however,  to  wear  out  during  the  existence  of  the 
life  estate,  should  be  paid  out  of  income  or  by  the 
life  tenant.  (Hitner  v.  Ege,  23  Pa.  St.  305 ;  Key- 
burn  V.  Wallace,  93  Mo.  326.)  If  the  betterments, 
though  not  permanent,  are  likely  to  last  beyond  the 
life  of  the  life  tenant,  the  tax  should  be  equitably 
apportioned  according  to  the  benefit  likely  to  be 
received  by  each  estate.  (Pratt  v.  Douglas,  38  N.  J. 
Eq.  517,  542  ;  Peck  v.  Sherwood,  56  K  Y.  615  ;  Fleet 
V.  Dorland,  11  How.  Pr.  489 ;  Huston  v.  Tribbetts, 
171  111.  547 ;  Bobb  v.  Wolff,  54  Mo.  App.  515  ;  Wor- 
din's  Appeal,  71  Conn.  531.) 

In  Bobb  V.  Wolff,  54  Mo.  App.  515,  a  special  tax 
was  assessed  for  constructing  a  granite  pavement  in 
front  of  an  estate.  The  evidence  was  that  the  life 
of  such  a  pavement  was  ordinarily  about  twenty- 
five  years.  The  life  tenant  was  seventy-six  years 
old  at  the  date  of  the  tax  bill.  His  expectation  of 
life  by  the  life  insurance  tables  was  5.88  years.  It 
was  held  that  one  quarter  of  the  tax  bill  should  be 
paid  by  the  life  tenant  and  three  quarters  by  the 
remainderman. 


OUTLAY.  63 

In  Eeyburn  v.  Wallace,  93  Mo.  326,  a  tax  for  the 
same  sort  of  pavement  was  held  chargeable  to  the 
life  tenant,  who  was  only  twenty-eight  years  old. 
His  expectation  of  life  was  over  thirty-six  years, 
and,  although  there  was  no  evidence  on  the  point, 
the  court  thought  that  the  pavement  could  not  be 
expected  to  last  longer  than  thirty-six  years. 

A  tax  assessed  for  laying  out  a  new  street  in  front 
of  property  has  been  held  payable  out  of  principal 
(Plympton  v.  Boston  Dispensary,  106  Mass.  544), 
also  a  tax  assessed  for  laying  in  a  sewer  (Tragbar's 
Estate,  12  Pa.  Co.  Ct.  R  635),  and  for  connecting  a 
house  with  a  sewer  (Bradley's  Estate,  3  Pa.  Dist, 
Ct.  E.  359).  A  tax  assessed  for  laying  a  brick  side- 
walk (Hitner  v.  Ege,  23  Pa.  St.  305),  or  an  asphalt 
sidewalk  (Wordin's  Appeal,  71  Conn.  531),  has  been 
held  payable  from  income  or  by  the  life  tenant. 

Taxes  upon  Unproductive  Property.  Taxes  upon 
unimproved  property  which  produces  no  income 
should  be  paid  out  of  the  corpus  of  the  estate. 
(Stone  V.  Littlefield,  151  Mass.  485 ;  Clark  v.  Mid- 
dlesworth,  82  Ind.  240  ;  Murch  v.  Smith  M'f'g  Co., 
47  N.  J.  Eq.  193  ;  In  re  Martens'  Estate,  39  K  Y.  S. 
189;  Patterson  v.  Johnson,  113  111.  559,576.)  It 
has  been  held  that,  although  the  liability  of  a  tenant 
for  life  to  pay  ordinary  taxes  is  limited  to  the  rental 
value  of  the  property,  rents  for  the  whole  term  of 
his  estate  are  answerable  for  the  payment  of  taxes 
accruing  during  said  term.  (Murch  v.  Smith  M'f'g 
Co.,  47  N.  J.  Eq.  193.) 


64  INCOME  AND   PRINCIPAL. 

Inheritance  Taxes.  Inheritance  taxes  upon  the 
interest  of  a  life  tenant  or  life  beneficiary  are  pay- 
able out  of  income.  Such  a  tax  upon  the  interest 
of  the  remainderman  is  payable  out  of  the  corpus. 
(Sohier  v.  Eldredge,  103  Mass.  345  ;  Brown's  Estate, 
208  Pa.  St.  161.) 

Repairs.  A  life  tenant  is  required  to  keep  the 
premises  in  reasonably  good  repair.  (Clemence  v. 
Steere,  1  K,  I.  272  ;  Kearney  v.  Ex'r  of  Kearney,  17 
N.  J.  Eq.  504 ;  Murch  v.  Smith  M'f  g  Co.,  47  N.  J. 
Eq.  193.)  He  is  not  obliged  to  make  improvements 
or  additions,  and  if  he  does  so,  although  the  value 
of  the  estate  of  the  remainderman  is  thereby  in- 
creased, the  life  tenant  cannot  encumber  the  estate 
or  charge  the  remainderman  with  the  expense  of 
such  improvements.  (Caldecott  v.  Brown,  2  Hare 
144 ;  Pratt  v.  Douglas,  38  N.  J.  Eq.  516,  542.) 

Alterations  and  Additions.  A  trustee  must  pay 
for  ordinary  repairs,  such  as  are  made  to  keep  the 
estate  in  good  condition,  out  of  income.  (Little  v. 
Little,  161  Mass.  188 ;  Abell  v.  Brady,  79  Md.  94, 
101.)  But  the  expense  of  alterations  and  additions 
should  be  charged  to  the  corpus  of  a  trust  fund. 
(Abell  V.  Brady,  79  Md.  94,  101 ;  In  re  Parr,  92 
N.  Y.  S.  990.)  Thus  the  cost  of  changing  into 
stores  the  lower  story  of  buildings  which  had  been 
used  as  dwelling  houses  is  chargeable  to  principal, 
as  is  also  the  cost  of  changing  an  apartment  hotel 
into  an  office  building.  But  the  expense  of  entirely 
replumbing  a  house,  repapering,  painting,  and  put- 


OUTLAY.  65 

ting  in  a  new  elevator  to  replace  an  old  one,  all  at 
a  cost  of  nearly  double  the  annual  rent,  has  been 
held  chargeable  to  income.  (Little  v.  Little,  161 
Mass.  188.) 

Repairs  of  Newly  Purchased  Property.  Expense 
of  putting  into  tenantable  repair  property  purchased, 
or  otherwise  acquired  by  trustees,  is  properly  charge- 
able to  principal  as  part  of  the  original  investment, 
though  subsequent  repairs  of  that  nature  would 
fall  upon  income.  (Parsons  v.  Winslow,  16  Mass. 
361.) 

Where  trustees  have  power  to  sell  property  left 
by  the  testator  and  to  reinvest,  but  choose  to  retain 
the  property  and  expend  considerable  sums  in  re- 
pairs and  alterations,  it  has  been  held  that  the  cost 
of  these  repairs  and  alterations  should  be  charged 
to  principal  as  a  new  investment  of  trust  funds. 
(Sohier  v.  Eldredge,  103  Mass.  345.)  On  the  other 
hand  it  was  held  by  the  same  court  in  a  later  case 
(Little  V.  Little,  161  Mass.  188)  that  there  is  no 
reason  for  drawing  a  line  at  a  testator's  death  so 
that  repairs  then  needed  should  be  called  improve- 
ments and  charged  to  principal.  In  apportioning 
expenses  in  the  nature  of  repairs  and  improvements 
between  income  and  principal,  a  trustee's  judgment 
will  probably  not  be  disturbed  by  the  courts  except 
when  clearly  wrong.  (Little  v.  Little,  161  Mass. 
188.)  The  general  principle  controlling  should  be 
that  what  is  designed  merely  to  renew,  or  repair 
waste  or  wearing  out  should  be  charged  to  income, 

5 


66  INCOME  AND   PRINCIPAL. 

and  what  is  designed  permanently  to  increase  the 
value  of  the  corpus  should  be  charged  to  principal. 

Insurance.  A  life  tenant  is  not  bound  to  insure 
the  interest  of  the  remainderman,  but  each  may 
insure  his  own  interest.  (Harrison  v.  Pepper,  166 
Mass.  288;  DeWitt  v.  Cooper,  18  Hun,  67.)  A 
trustee  who  holds  the  legal  title  for  both  has  the 
duty  of  insuring ;  and  accordingly  insurance  pre- 
miums paid  by  a  trustee  would  probably  be  univer- 
sally treated  as  an  ordinary  expense  of  holding  and 
managing  the  property,  and  so  payable  out  of  in- 
come. (Bridge  v.  Bridge,  146  Mass.  373.)  The 
general  practice  of  trustees  is  to  charge  insurance 
premiums  to  income.  (Loring's  Trustee's  Handbook, 
2d  ed.,  p.  116.) 

Insurance  money  which  comes  to  a  trustee  be- 
cause of  either  partial  or  total  loss  should  be  used  in 
rebuilding,  or  reinvested  as  part  of  the  principal, 
the  income  of  it  only  belonging  to  the  life  bene- 
ficiary. Similarly,  in  case  of  insurance  money  paid 
to  a  life  tenant,  if  the  insurance  was  on  the  property 
itself,  the  money  is  the  corpus  of  the  estate  in  an- 
other form,  and  should  either  be  used  in  rebuilding 
or  be  invested.  (Clyburn  v.  Keynolds,  31  S.  C.  91, 
119.)  If,  however,  the  insurance  money  represents 
only  the  interest  of  the  life  tenant,  it,  of  course, 
belongs  entirely  to  him.  (Harrison  v.  Pepper,  166 
Mass.  288.) 

Interest  on  Incumbrances.  Interest  on  an  in- 
cumbrance  on  the  property,  for  example  a  mort- 


OUTLAY.  67 

gage,  must  be  paid  by  a  life  tenant,  although  it 
would  not  be  safe  for  a  remainderman  as  against 
the  mortgagee  to  rely  on  the  liability  of  the  life 
tenant  to  pay  the  interest.  (Martin  v.  Martin,  146 
Mass.  517;  Plympton  v.  Boston  Dispensary,  106 
Mass.  544.)  Similarly,  a  trustee  who  places  an  in- 
cumbrance on  property,  or  allows  one  to  remain, 
should  pay  the  interest  out  of  income.  If  the 
trustee  pays  off  the  principal  of  the  incumbrance 
he  should  pay  it  out  of  the  principal  of  the  trust 
fund  of  which  both  the  life  tenant  and  remain- 
derman are  beneficiaries.  (Martin  v.  Martin,  146 
Mass.  517 ;  Plympton  v.  Boston  Dispensary,  106 
Mass.  544.) 

If  a  remainderman  pays  off  the  incumbrance, 
the  life  tenant  must  continue  to  pay  interest  to  the 
remainderman,  or,  what  is  more  usual,  must  pay  to 
the  remainderman  the  present  worth  of  an  annuity 
equal  to  the  annual  interest  running  during  the 
number  of  years  which  constitute  the  expectancy 
of  life  of  the  tenant  for  life.  (Moore  v.  Simonson, 
27  Or.  117 ;  Plympton  v.  Boston  Dispensary,  106 
Mass.  544.) 

Expenses  of  Management.  —  Trustees'  Charges. 
The  expenses  of  managing  a  trust  estate  should 
come  out  of  current  income.  (Peirce  v.  Burroughs, 
58  N.  H.  302 ;  Butterbaugh's  Appeal,  98  Pa.  St.  351 ; 
Wordin's  Appeal,  71  Conn.  531.)  Such  expenses 
include  trustees'  charges  for  investing  the  fund  and 
collecting  the  income,  and  reasonable  sums  paid  in 


68  INCOME   AND  PRINCIPAL. 

counsel  fees  in  regard  to  matters  concerning  man- 
agement. (Parker  v.  Ames,  121  Mass.  220  ;  Danly 
V.  Cummins's  Ex'r.,  31  N.  J.  Eq.  208.)  It  seems  that 
expense  of  changing  investments  should  also  come 
out  of  income,     (Parker  v.  Hill,  185  Mass.  14.) 

Brokerage.  Brokerage  on  changes  of  investment 
is  paid  out  of  income.  (Heard  v.  Eldredge,  109 
Mass.  258.)  Brokerage  on  the  sale  or  purchase  of 
real  estate  is  in  practice  charged  to  principal,  be- 
cause the  custom  is  to  treat  such  brokerage  as  part 
of  the  price  of  the  property.  (Loring's  Trustee's 
Handbook,  2d  ed.,  p.  117.) 

Commissions  on  Collections  of  Principal.  It  is  the 
practice  of  many  trustees  to  make  a  separate  charge 
against  principal  for  services,  in  the  form  of  a  com- 
mission on  collections  of  principal  from  the  sale  of 
rights  and  from  stock  dividends,  and  there  is  some 
seeming  authority  for  the  practice.  (Gordon  v. 
West,  8  N.  H.  444.)  It  is  extremely  doubtful  if 
such  collections  are  substantially  different  from 
changes  in  investments,  and  the  decision  of  Parker 
V.  Hill,  185  Mass.  14,  discountenances  the  practice 
of  distinguishing  between  such  service  and  other 
service  of  management.  (See  also  Spangler's  Es- 
tate, 21  Pa.  St.  335.) 

It  has  been  held  that  the  expense  of  bringing 
foreclosure  suits  which  proved  fruitless  was  charge- 
able to  income,  because  properly  incident  to  the 
management  of  the  trust.  (Wordin's  Appeal,  71 
Conn.  531.) 


OUTLAY.  69 

If  a  trustee  neglects  to  deduct  from  current  in- 
come charges  which  income  should  properly  bear, 
he  cannot  deduct  them  from  other  income  from  the 
same  property  payable  to  a  person  who  is  subse- 
quently entitled.     (Parker  v.  Ames,  121  Mass.  220.) 

Costs  of  Bill  for  Instructions.  Costs  of  all  parties 
in  a  suit  properly  brought  by  a  trustee  to  clear  up 
an  ambiguity  in  the  language  of  the  will  are  pay- 
able out  of  the  corpus  of  the  fund  or  property  in- 
volved. (Bowditch  V.  Soltyk,  99  Mass.  136  ;  Deane 
V.  Home  for  Aged  Colored  Women,  111  Mass.  132.) 

Expenses  of  Administration.  Expenses  of  man- 
aging and  carrying  out  the  trust  should  be  carefully 
distinguished  from  the  expenses  of  administration 
of  the  estate  of  the  testator  who  created  the  trust. 
Expenses  of  administration,  including  the  expenses 
of  a  contest  over  the  probate  of  a  will,  are  to  be 
taken  from  corpus  (Bartlett,  Petitioner,  163  Mass. 
509,  522),  including  also  expenses  lawfully  incurred 
in  defending  an  estate  against  claims  which  accrued 
in  the  lifetime  of  the  testator.  (Quinn  v.  Madigan, 
65  N.  H.  8.) 


CHAPTER  VII. 
APPORTIONMENT  OF  CURRENT  INCOME. 

It  is  a  general  principle  of  common  law  that 
sums  of  money  payable  at  fixed  times  are  not  to  be 
apportioned  when  the  right  to  them  changes  be- 
tween the  times  set  for  payment.  The  person  en- 
titled at  the  date  fixed  for  payment  is  entitled  to 
the  whole  payment.  (Dexter  v.  Phillips,  121  Mass. 
178;  Clapp  v.  Astor,  2  Edw.  Ch.  379.) 

Rent  not  apportioned  at  Common  Law.  Rent  has 
always  been  considered  as  a  payment  of  this  sort. 
The  courts  refused  to  take  the  view  that  it  accrued 
proportionally  from  day  to  day,  but  viewed  each 
payment  of  rent  as  an  entirety.  Accordingly  the 
common-law  rule  was  that  rent  was  not  apportion- 
able  between  successive  owners  or  between  a  life 
tenant  and  his  successor  in  title.  The  owner  or 
life  tenant  at  the  time  the  rent  period  ended  was 
entitled  to  the  whole  rent  then  due.  If  a  life  ten- 
ant died  only  one  day  before  a  three  months'  rent 
period  ended,  his  estate  could  get  none  of  the 
rent.  (Dexter  v.  Phillips,  121  Mass.  178 ;  Sohier  v. 
Eldredge,  103  Mass.  345.) 

Since  a  person  entitled  to  income  of  trust  prop- 
erty has  an  equitable  claim  on  the  income  as  it 


APPORTIONMENT  OF   CURRENT   INCOME.  71 

comes  into  the  hands  of  the  trustee  or  as  the  trus- 
tee's right  to  it  accrues,  this  rule  of  apportionment 
affects  him.  (White  v.  Stanfield,  146  Mass.  424.) 
Accordingly  under  the  common-law  rule  a  trustee 
should  pay  to  the  first  taker  of  income  which  comes 
to  the  trustee  as  rent  only  such  portion  of  the  rent 
as  was  due  at  the  time  such  beneficiary  ceased  to 
be  entitled  to  the  income.  If  Ms  right  to  income 
ceased  in  the  middle  of  a  rent  period,  the  trustee 
should  not  pay  to  him  or  his  representatives  any 
part  of  the  rent  which  had  accrued  but  was  not 
due.     (Adams  v.  Adams,  139  Mass.  449.) 

Another  point  of  time  which  is  important  in  the 
question  of  apportionment  is  the  date  of  the  tes- 
tator's death.  In  the  absence  of  statute,  income  not 
apportionable  at  common  law  which  becomes  due 
after  the  testator's  death  must  be  classed  as  in- 
come, regardless  of  how  long  it  has  been  accruing, 
and  will  go  to  persons  entitled  to  income  at  the 
time  it  becomes  due.  (Dexter  v.  Phillips,  121  Mass. 
178  ;  Matter  of  Kernochan,  104  N.  Y.  618  ;  Mc- 
Keen's  Appeal,  42  Pa.  St.  479.) 

Statute  La'w  of  Apportionment  of  Rent.  This  rule, 
especially  as  applied  to  rent  for  a  period  which  had 
partly  elapsed  at  the  death  of  a  life  tenant,  seemed 
so  unjust,  that  many  States  have  enacted  statutes 
changing  the  rule.  Some  States  have  made  all  in- 
come apportionable  as  between  persons  successively 
entitled,  as  if  it  accrued  from  day  to  day.  (Eev. 
Laws  of  Mass.  (1902)  eh.  141,  §§  24,  25;   N.  Y. 


72  INCJOME  AND  PRINCIPAL. 

Code  of  Civil  Procedure,  §  2720 ;  Matter  of  Young, 
23  Misc.  (N.  Y.)  223;  Miller  v.  Crawford,  26 
Abb.  N.  C.  376  :  Matter  of  Franklin,  26  Misc. 
(N.  Y.)  107  ;  Code  of  N.  Car.  (1883),  §  1748 ; 
Gen.  Laws  E.  I.  (1896),  ch.  203,  §§  38,  39); 
English  Apportionment  Act  of  1870,  33  &  34  Vict., 
ch.  35. 

Others  have  enacted  sipaply  that  rent  shall  be  ap- 
portioned to  a  life  tenant  up  to  the  time  of  his 
death.  Under  these  statutes  a  trustee  holding  the 
fee  would  be  required  to  apportion  to  income  of  a 
life  beneficiary  such  part  of  rent  as  had  accrued, 
though  not  then  payable,  at  the  time  of  the  death 
of  the  life  beneficiary.  (Digest  of  Stats,  of  Ark. 
(1894),  §  4453;  Laws  of  Del.  (1893),  ch.  120,  §  15  ; 
Eev.  Stats,  of  111.  (Hurd,  1903),  ch.  80,  §  35  ;  Burns' 
Annot.  Stats,  of  Ind.  (1901),  §  7104;  Ind.  Terr. 
Stats.  (1899),  §  2837;  Code  of  Iowa,  Annot. 
(1897),  §  2988 ;  Ky.  Stats.  (1903),  §  3865 ;  Eed- 
mond  V.  Bedford,  80  Ky.  13  ;  Annot.  Code  of  Miss. 
(1892),  §  2543;  Eev.  Stats,  of  Mo.  (1899),  §  4098; 
Gen.  Stats,  of  N.  J.  (1709-1893),  Vol.  II.  p.  1915, 
§  2 ;  Brightly's  Purdon's  Digest  of  Pa.  Stats.  (12th 
ed.).  Vol.  I,  p.  584,  §§  71,  72;  Borie  v.  Criss- 
man,  82  Pa.  St.  175  ;  Civil  Code  of  S.  C.  (1902), 
Vol.  I,  §§  2408,  2409;  Code  of  Tenn.  (1896), 
§  4184;  Eowan  v.  Eiley,  6  Bax.  (Tenn.)  67;  Va. 
Code,  Annot.  (1904),  §§  2809,  2810  ;  Code  of  W.  Va. 
(4th  ed.  1899),  ch.  94,  §  1,  and  ch.  95,  §  1  ;  Wise. 
Stats.  (1898),  §  2193.) 


APPORTIONMENT   OF  CUREENT  INCOME.  73 

Annuities  not  apportioned  at  Common  Law.  An- 
nuities belong  with  rent  in  the  class  of  sums  of 
money  payable  on  fixed  dates,  and  in  general  are 
not  apportionable  to  the  death  of  the  annuitant  ex- 
cept by  statute.  (Wiggin  v.  Swett,  6  Met.  194, 
201 ;  Bailey's  Estate,  23  Pa.  C.  C.  139 ;  Heizer  v. 
Heizer,  71  Ind.  526  ;  Henry  v.  Henderson,  81  Miss. 
743  ;  Kearney  v.  Cruikshank,  117  N.  Y.  95;  Chase 
V.  Darby,  110  Mich.  314.)  An  annuity  may  be 
defined  to  mean  any  fixed  sum  of  money  granted  or 
bequeathed  payable  at  regular  periods.  (Nehls  v. 
Sauer,  119  Iowa,  440 ;  Bates  v.  Barry,  125  Mass.  83.) 

Exceptions.  An  exception  has  always  been  made 
where  the  annuity  was  evidently  given  for  the  sup- 
port of  a  minor  child  or  of  a  wife  living  separate 
from  her  husband.  Such  annuities  are  apportioned  to 
the  date  of  the  annuitant's  death.  (Quinn  v.  Madi- 
gan,  65  N.  H.  8 ;  Tn  re  Nathan  Cushing's  Will,  58 
Vt.  393  ;  In  re  Lackawanna  Iron  &  Coal  Co.,  37  N.  J. 
Eq.  26 ;  Henry  v.  Henderson,  81  Miss.  743.)  The 
courts  of  some  States  have  extended  this  exception 
to  include  all  annuities  which  seem  to  have  been 
intended  for  the  support  of  the  annuitant.  (In  re 
Lackawanna  Iron  v.  Coal  Co.,  37  N.  J  Eq.  26  ;  In  re 
Nathan  Cushing's  Will,  58  Vt.  393 ;  Quinn  v.  Madi- 
gan,  65  N.  H.  8 ;  Note  to  Henry  v.  Henderson,  63 
L.  E.  A.  616.)  Some  States  have  extended  the  excep- 
tion to  annuities  given  in  lieu  of  dower,  on  the  ground 
that,  as  dower  would  last  to  the  date  of  the  widow's 
death,  what  is  given  in  place  of  it  should  last  as 


74  INCOME  AND   PRINCIPAL. 

long.  (R  I.  Hospital  Trust  Co.  v.  Harris,  20  K.  I. 
160;  Blight  v.  Blight,  51  Pa.  St.  420;  Parker  v. 
Seeley,  56  N.  J.  Eq.  110.)  Other  States  have  re- 
fused to  carry  the  exception  as  far.  (Mower  v. 
Sandford,  76  Conn.  504 ;  Chase  v.  Darby,  110  Mich. 
314.  See  note  to  Henry  v.  Henderson,  63  L.  li.  A. 
616.) 

Statute  La'w  of  Apportionment  of  Annuities.  Some 
States  have  by  statute  made  annuities  apportionable 
up  to  the  death  of  the  annuitant.  (R.  L.  of  Mass., 
ch.  141,  §  25;  N.  Y.  Code  of  Civil  Procedure, 
§  2720 ;  Code  of  W.  Va.  (4th  ed.,  1899),  ch.  95, 
§1;  Va.  Code,  Annot.  (1904),  §  2810;  Ky.  Stats. 
(1903),  §  2070 ;  Code  of  No.  Car.  (1883),  §  1748. 
Eng.  Apportionment  Act  of  1870,  (33  &  34  Vict. 
c.  35).)  The  statutes  of  Ehode  Island  contain  a 
similar  provision  in  regard  to  annuities  given  by 
will  or  by  an  instrument  in  the  nature  thereof. 
(Gen.  Laws  R.  I.  (1896),  ch.  203,  §  39.) 

When  no  different  intention  is  apparent  in  the 
will  or  other  instrument  creating  an  annuity  it  is 
taken  to  be  payable  yearly  on  the  anniversary  of 
the  date  of  the  instrument,  or  in  a  case  of  a  will,  on 
the  anniversary  of  the  date  of  the  testator's  death. 
(Henry  v.  Henderson,  81  Miss.  743;  Kearney  v. 
Cruikshank,  117  N.  Y.  99 ;  Gibson  v.  Bott,  7  Ves. 
89,  and  note.) 

Regular  Dividends  not  apportioned.  The  regular 
dividends  on  shares  of  stock  in  corporations  or  asso- 
ciations based  upon  current  income  are  not  appor- 


APPORTIONMENT   OF  CURRENT   INCOME.  75 

tionable  as  to  time.  Profits  made  by  the  company 
do  not  belong  to  .the  stockholder  until  a  dividend  is 
declared,  and  until  it  is  declared  there  is  ordinarily 
no  certainty  that  there  will  be  one.  It  is  moreover 
impracticable  to  determine  just  when  within  each 
year  profits  accrue  to  the  company,  for  they  are  not 
usually  a  steady  accretion.  (Clapp  v.  Astor,  2  Edw. 
Ch.  379  ;  Hyatt  v.  Allen,  56  N.  Y.  553  ;  Foote,  Ap- 
pellant, 22  Pick.  299;  Greene  v.  Huntington,  73 
Conn.  106,  115;  Boss's  Estate,  2  Kulp.  472;  Mann 
V.  Anderson,  106  Ga.  818.  See  contra  Ex  parte 
Eutledge,  Harp.  Eq.  (S.  C.)  65.) 

Effect  of  Statutes.  Even  where  a  statute  enacts 
that  "  an  annuity,  or  the  use,  rent,  income,  or  inter- 
est of  property"  shall  be  apportioned  between  life 
tenant  and  remainderman  to  the  date  of  the  former's 
death  the  courts  have  decided  that  dividends  of  cor- 
porations are  not  apportionable.  (Granger  v.  Bas- 
sett,  98  Mass.  462.  See  also  Adams  v.  Adams,  139 
Mass.  449.) 

Extraordinary  Dividends.  The  law  relating  to  ex- 
traordinary dividends  has  been  dealt  with  in  another 
place.  The  question  of  apportioning  extraordinary 
dividends  is  a  very  different  one  because  it  is  usually 
possible  and  even  easy  in  such  a  case  to  tell  from 
the  annual  or  semi-annual  reports  of  the  company 
just  when  the  profits  of  the  company  accrued,  reck- 
oning in  periods  of  a  year  or  six  months,  or  what- 
ever periods  are  covered  by  the  reports.  (Cases 
cited,  supra,  p.  24.) 


76  INCOME  AND   PRINCIPAL. 

Profits  not  apportioned.  It  has  also  been  decided 
on  the  same  reasoning  that  where  a  life  beneficiary 
who  is  entitled  to  the  profits  of  the  testator's  share 
in  a  partnership  dies  between  the  days  of  account- 
ing, the  profits  are  not  apportion  able.  The  reason 
is  that  in  business  profits  do  not  accrue  steadily 
from  day  to  day  and  so  are  incapable  of  apportion- 
ment. (Browne  v.  Collins,  L.  E.  12  Eq.  586 ;  Jones 
V.  Ogle,  L.  K.  8  Chan.  192 ;  McKeen's  Appeal,  42 
Pa.  St.  479.)  In  the  case  of  profits  of  a  partnership 
the  important  date  is  not  the  date  on  which  the 
profits  are  ascertained,  but  the  period  for  which 
they  are  ascertained.  For  example,  profits  of  a  part- 
nership for  a  period  of  accounting  ending  May  1st 
would  belong  to  the  person  entitled  to  income  on 
that  date  although  the  profits  were  not  ascertained 
until  several  months  after  his  interest  ceased. 
(Browne  v.  Collins,  L.  E.  12  Eq.  586  ;  Jones  v.  Ogle, 
L.  E.  8  Chan.  192.)  i 

Dividends  payable  after  Death  of  Life  Tenant.  In 
case  of  a  dividend,  declared  by  a  corporation  during 
the  life  of  the  life  tenant,  but  payable  on  a  date 
before  which  he  dies,  the  entire  dividend  belongs  to 
the  life  tenant.  (Hill  v.  Newichawanick  Co.,  8 
Hun,  459,  71  N.  Y.  593.)  It  has  also  been  held  in 
Massachusetts  that  where,  on  June  23rd,  the  corpo- 

*  It  has  been  held  that  profits  of  partnerships  are  not  apportion- 
able  under  the  English  Apportionment  Act  of  1870,  although  regu- 
lar dividends  of  corporations  are  apportioned  as  if  the  earnings 
accmed  from  daj  to  day.    (Browne  v.  Collins,  L.  R.  12  Eq.  586.) 


APPORTIONMENT   OF  CURRENT  INCOME.  77 

ration  declared  a  dividend,  stating  that  it  was  out 
of  the  gain  and  profit  earned  and  acquired  during 
the  year  preceding  the  31st  day  of  May,  this  divi- 
dend belongs  to  the  estate  of  a  life  tenant  who  died 
June  12th.  (Johnson  v.  Bridgewater,  etc.,  Co.,  14 
Gray,  274.)  This  case  seems  inconsistent  with  the 
accepted  doctrine  in  Massachusetts  that  profits  are 
not  income  of  the  stockholder  until  the  dividend  is 
declared.  (See  Bates  v.  Mackinley,  31  Beav.  280, 
contra.) 

Dividends  by  Savings  Banks.  Semi-annual  divi- 
dends paid  depositors  in  savings  banks,  though  often 
spoken  of  as  interest  on  the  deposits,  are  in  the 
class  of  dividends  of  corporations,  and  as  such  are 
not  apportionable.  (Greene  v.  Huntington,  73  Conn. 
106, 114.) 

A  trustee  who  sells  shares  of  stock  shortly  before 
the  time  for  the  declaration  of  the  regular,  dividend 
cannot  give  part  of  what  he  receives  to  income, 
although  he  receives  a  better  price  for  the  stock 
because  of  the  nearness  of  the  dividend  day.  (Bul- 
keley  v.  Stephens,  L.  E.  (1896),  2  Ch.  241.)  i 

Interest  apportioned.     Interest  on  debts  and  loans 

1  But  see  Lord  Londesborough  v.  Somerville,  19  Beav.  295, 
where  a  trustee  sold  consols  a  month  before  the  regular  dividend 
day.  It  was  held  that  the  life  tenant  was  entitled  to  such  portion 
of  the  selling  price  as  the  latter  was  augmented  by  the  proximity 
of  the  dividend.  A  sufficient  reason  for  this  decision  may  be  found 
in  the  fact  that  the  dividends  on  consols  are  absolutely  certain,  both 
as  to  amount  and  date  of  payment,  so  that  it  is  possible  to  figure 
out  how  much  has  accrued  at  any  date. 


78  INCOME   AND   PRINCIPAL. 

is  apportionable  at  common  law.  It  is  considered 
as  accruing  from  day  to  day  for  delay  of  payment  of 
what  is  due.  (Dexter  v.  Phillips,  121  Mass.  178; 
Riggs  V.  Cragg,  26  Hun,  89,  98.) 

Interest  on  Mortgage  Notes.  This  is  true  of  inter- 
est on  mortgage  notes  where  the  interest  is  by  con- 
tract made  payable  at  certain  definite  times.  The 
reason  given  for  taking  such  payments  out  of  the 
ordinary  rule  of  payments  of  money  coming  due  at 
fixed  times  is  that  the  note  or  mortgage  is  only  se- 
curity for  the  debt  and  interest.  (Dexter  v.  Phillips, 
121  Mass.  178;  Banner  v.  Lowe,  13  Ves.  135.) 

Interest  on  Consols,  etc.  The  English  courts  dis- 
tinguished between  interest  on  debts  or  notes  and 
interest  on  the  public  funds,  holding  that  the  latter 
was  by  common  law  not  apportionable.  It  was 
held  to  come  within  the  class  of  payments  coming 
due  at  fixed  times.  (Pearly  v.  Smith,  3  Atk.  260 ; 
Wilson  V.  Harman,  2  Ves.  Sen.  671.  See  also 
Warden  v.  Ashburner,  2  De  Gr.  &  Sm.  366.) 

Interest  Coupons.  The  Massachusetts  courts  have 
followed  the  English  rule  as  to  interest  on  the 
public  debt,  except  in  cases  coming  within  the 
Massachusetts  statute  of  apportionment,  and  have 
applied  it  to  interest  on  coupon  bonds  of  all  kinds, 
including  those  of  private  corporations.  The  reason 
given  for  the  distinction  between  such  interest  and 
interest  on  debts  is  that  each  interest  coupon  con- 
stitutes a  separate  contract  to  pay  a  definite  amount 
of  money  at  a  certain  time.     They  may  be  sepa- 


APPORTIONMENT   OF  CURRENT  INCOME.  79 

rately  negotiated,  and  the  owner  of  a  coupon  may 
at  maturity  sue  for  the  amount,  although  he  is  not 
the  holder  of  the  bond.  The  statute  of  limitations 
begins  to  run  on  each  coupon  at  its  maturity.  When 
coupons  have  been  separated  from  the  bond  to 
which  they  were  originally  attached,  they  are  not 
affected  by  a  cancellation  or  payment  of  the  bond. 
For  these  reasons  it  was  held  in  Massachusetts  that 
each  coupon  represented  an  obligation  distinct  from 
the  bond  and  from  each  other  coupon,  and  could 
not  by  any  fiction  be  taken  as  representing  interest 
on  the  bonds  accruing  from  day  to  day.  (Dexter  v. 
Phillips,  121  Mass.  178.) 

The  Pennsylvania  and  New  York  courts  seem  to 
have  taken  a  different  view,  and  would  probably 
apportion  interest  on  coupon  bonds.  (Wilson's 
Appeal,  108  Pa.  St.  344,  overruling  Earp's  Will, 
1  Pars.  Eq.  453;  U.  S.  Trust  Co.  v.  Tobias,  21  Abb. 
N.  C.  393.) 


CHAPTER  VIII. 

A  SUMMARY  OF  THE  STATUTES  AND  DECISIONS 
IN  THE  VARIOUS  STATES  BEARING  UPON 
APPORTIONMENT  OF  CURRENT  INCOME. 

Arkansas.  If  a  life  tenant  who  has  underlet 
premises  dies  before  the  rent  shall  become  payable, 
his  estate  is  entitled  to  such  proportion  of  the  rent 
as  shall  have  accrued  before  his  death.  (Digest  of 
Stats,  of  Ark.  (1894),  §  4453.) 

Connecticut.  No  statute  on  apportionment  of 
income. 

The  decisions  hold  that  there  is  no  apportionment 
of  rent,  of  annuities,  of  annuities  in  lieu  of  dower, 
or  of  dividends,  including  dividends  to  depositors 
in  savings  banks.  Interest  payable  semi-annually 
is  apportionable.  (Greene  v.  Huntington,  73  Conn. 
106,  114;  Mower  v.  Sanford,  76  Conn.  504.) 

Tenant  for  life  is  entitled  to  a  crop  sowed  before 
his  death  but  harvested  after  his  death.  (Bradley 
V.  Bailey,  56  Conn.  374.) 

Delaware.  If  a  life  tenant  who  has  underlet 
premises  dies  before  the  rent  shall  become  payable, 
his  estate  is  entitled  to  such  proportion  of  the  rent 


SUMMARY   OF  STATUTES   AND   DECISIONS.         81 

as  shall  have  accrued  before  his  death.     (Laws  of 
Del.  (1893),  ch.  120,  §  15.) 

Georgia.  Life  tenant  or  his  legal  representatives 
are  entitled  to  profits  of  crop  sowed  by  him  although 
his  estate  be  terminated,  not  by  his  act,  before  har- 
vest, whether  the  crop  be  annual  or  perennial. 
(Code  of  Ga.  (1895),  Vol.  II,  §  3092.)  The  Code  also 
enacts  that  if  a  tenant  for  life  rents  the  land  for  a 
year,  and  dies,  or  the  estate  is  otherwise  terminated 
during  the  year,  the  tenant  shall  be  entitled  to  the 
land  for  the  term  of  the  year,  upon  complying  with 
his  contract  with  the  life  tenant.     (§  3093.) 

Illinois.  Statutes  give  to  executors  or  adminis- 
trators of  a  life  tenant  of  lands,  who  has  died  before 
the  day  when  any  rent  shall  become  due  from  an 
under-tenant,  the  right  to  recover  from  the  latter  the 
proportion  of  rent  which  accrued  before  the  death  of 
the  hfe  tenant.  (Eev.  Stats,  of  111.  (Hurd-1903), 
chap.  80,  §  35.) 

Indiana.  Executor  or  administrator  of  a  life 
tenant  who  dies  before  the  day  when  any  rent  is  to 
become  due  may  recover  from  the  under-tenant  the 
proportion  of  rent  which  accrued  before  his  death, 
and  the  remainderman  shall  recover  the  residue. 
(Burns'  Annot.  Stats,  of  Ind.  (1901),  §  7104.) 

Indian  Territory.  Statutes  (1899),  §  2837,  pro- 
vide for  apportionment  of  rent  to  life  tenant  up  to 
the  time  of  his  death. 

6 


82  INCOME   AND  PRINCIPAL. 

Iowa.  The  executor  of  a  tenant  for  life  who  dies 
before  rent  is  payable  and  a  person  entitled  to  rent 
dependent  on  the  life  of  another  may  recover  from 
the  under-tenant  the  proportion  of  the  rent  which 
had  accrued  at  the  time  of  the  death.  (Code  of 
Iowa,  Annot.  (1897),  §  2988.) 

Annuities  are  not  apportionable  except  in  the 
recognized  exceptions.  (Nehls  v.  Sauer,  119  Iowa, 
440.) 

Kentucky.  Statutes  enact  that  "  when  a  person 
who  has  a  freehold  or  an  uncertain  interest  in  land  " 
rents  the  land  and  dies  before  the  rent  shall  have 
become  due,  the  rent  "  shall  be  apportioned  between 
the  personal  representatives  of  the  deceased  and  the 
person  who  shall  succeed  to  the  land  as  heir,  per- 
sonal representative,  devisee,  or  person  in  reversion 
or  remainder,  unless  in  the  case  of  a  devisee  the  will 
shall  otherwise  direct."  (Ky.  Stats.  (1903),  §  3865.) 
This  statute  applies  to  life  tenant  and  remainder- 
man.    (Eedmon  v.  Bedford,  80  Ky.  13.) 

Emblements  of  lands  of  a  person  dying  after 
March  1st,  which  shall  be  severed  before  December 
31st  following,  belong  to  his  personal  representatives. 
(Ky.  Stats.  (1903),  §  3862.) 

Annuities  are  also  apportioned  to  the  death  of  the 
annuitant  in  proportion  to  the  time  elapsed.  (Ky. 
Stats.  (1903),  §  2070.) 

Massachuse^'TS.  Statute  enacts  that  a  person 
entitled  by  will,  deed,  or  other  instrument,  to  an 


SUMMAKY   OF  STATUTES  AND  DECISIONS.         83 

annuity  or  the  rent,  income,  or  interest  of  property 
for  life  or  until  the  happening  of  a  contingency,  or 
his  representative,  shall  have  the  same  apportioned 
if  his  right  or  estate  therein  terminates  between  the 
days  on  which  it  is  payable,  unless  otherwise  pro- 
vided in  the  will  or  instrument.  (Eev.  Laws  of 
Mass.  (1902),  ch.  141,  §  25.)  It  is  important  to 
notice  that  the  statute  applies  only  to  cases  where 
the  limited  estate  is  created  by  will  or  other  instru- 
ment, and  so  would  not  apply  where  a  widow  or 
husband  acquires  a  life  estate  under  statute.  More- 
over the  statute  applies  only  as  between  life  tenants, 
or  life  beneficiaries,  or  persons  whose  estate  or  en- 
joyment of  income  is  to  terminate  on  the  happening 
of  some  contingency  and  the  persons  entitled  next 
after  them.  It  applies  only  at  the  termination  of 
such  limited  estate  and  so  has  no  application  to 
apportionment  on  changes  of  investment.  Sargent 
V.  Sargent,  103  Mass.  297. 

In  cases  where  the  statute  applies  the  following 
kinds  of  income  are  apportionable  as  to  time  :  in- 
terest on  notes  or  debts  (White  v.  Stanfield,  146 
Mass.  424) ;  interest  on  coupon  bonds  (Adams  v. 
Adams,  139  Mass.  449)  ;  rent  and  annuities.  Divi- 
dends on  shares  of  stock  are  not  apportionable  even 
under  the  statute,  and  probably  not  profits  of  a  busi- 
ness.    (Granger  v.  Bassett,  98  Mass.  462. ) 

In  cases  which  do  not  come  within  the  statute 
the  common-law  rules  apply.  In  such  cases  interest 
on  money  loaned  on  mortgage  notes  is  apportionable 


84  INCOME  AND   PRINCIPAL. 

(Foote,  Appellant,  22  Pick.  299),  but  interest  on 
coupon  bonds  is  not  apportionable  except  in  cases 
which  come  within  the  application  of  the  statute. 
A  semi-annual  interest  coupon  falling  due  a  week 
after  a  testator's  death  would  all  belong  to  income, 
but  semi-annual  interest  on  a  mortgage  note  falling 
due  at  the  same  time  would  be  apportioned  between 
principal  and  income.  (Dexter  v.  Phillips,  121  Mass. 
178 ;  Sargent  v.  Sargent,  103  Mass.  297.)  Rent  is 
not  apportionable  except  by  the  statute.  (Dexter  v. 
Phillips,  121  Mass.  178.) 

Where  a  trustee  sells  coupon-bearing  bonds  be- 
tween the  interest  days,  no  separate  sum  being 
charged  for  accrued  interest,  although  the  accrued 
interest  would  increase  the  price  of  the  bonds,  none 
of  the  money  received  is  set  apart  to  the  persons 
entitled  to  income.  (Sargent  v.  Sargent,  103  Mass. 
297.)  But  when,  as  is  customary  in  the  Boston 
market  on  a  purchase  or  sale  of  bonds,  a  separate 
charge  is  made  for  "  accrued  interest,"  this  accrued 
interest  should  be  charged  to  income  on  a  purchase 
by  a  trustee  and  given  to  income  on  a  sale.  (Hem- 
en  way  V.  Hemenway,  134  Mass.  446.) 

Michigan.  No  statute  on  apportionment  of  in- 
come. Annuities  are  not  apportionable  except  when 
given  to  a  married  woman  living  separate  from  her 
husband,  or  for  the  maintenance  of  a  minor.  (Chase 
V.  Darby,  110  Mich.  314.) 

Mississippi.  Statute  enacts  that  tenant  for  life 
or  for  life  of  another  shall  have  rent  apportioned  to 


SUMMARY   OF   STATUTES  AND   DECISIONS.  85 

time   of   death  or  ceasing  of  his  estate.     (Annot. 
Code  of  Miss.  (1892),  §  2543.) 

Missouri.  Similar  statute  to  that  in  Mississippi. 
(Eev.  Stats.  Mo.  (1899),  §  4098.) 

New  Hampshire.  No  statute  on  apportionment. 
Common-law  rules  of  apportionment  of  rent,  annu- 
ities, interest,  and  dividends  prevail.  (Quinn  v. 
Madigan,  65  N.H.  8.  But  see  Perry  v.  Aldrich,  13 
N.  H.  343.) 

Annuities  to  widow  in  lieu  of  dower  are  appor- 
tioned.    (Quinn  v.  Madigan,  65  N.  H.  8.) 

New  Jersey.  By  statute  a  life  tenant  is  entitled 
to  a  proportional  part  of  rent  up  to  the  date  of  his 
death,  although  the  rent  is  not  then  due  and  the  rent 
period  has  not  expired.  (General  Statutes  of  N.  J. 
(1709-1895),  Vol.  II,  p.  1915.) 

An  annuity  to  a  wife  evidently  given  for  her  sup- 
port is  apportioned  to  the  date  of  her  death.  (In  re 
Lackawanna  Iron  &  Coal  Co.,  37  N.  J.  Eq.  26.)  An 
annuity  in  lieu  of  dower  is  also  apportioned.  (Par- 
ker V.  Seeley,  56  N.  J.  Eq.  110.) 

New  York.  Statutes  require  apportionment  of 
rents,  annuities,  dividends,  and  other  payments  of 
every  description  made  payable  or  becoming  due  at 
fixed  periods  under  any  instrument  executed  after 
June  7,  1875,  or  any  will  taking  effect  after  that 
date,  so  that  on  the  death  of  any  person  interested 
in  such  rents,  annuities,  etc.,  or  in  the  estate  or  fund 


86  INCOME   AND   PRINCIPAL. 

from  or  in  respect  to  which  they  are  derived,  or  on 
the  determination  by  any  other  means  of  his  in- 
terest, he  or  his  representatives  shall  be  entitled  to 
a  proportion  of  such  rents,  etc.,  according  to  the 
time  which  has  elapsed  since  the  last  payment  was 
due.     (Code  of  Civil  Procedure,  N.  Y.,  §  2720.) 

Under  the  statute,  income  of  trust  estates,  except 
dividends  on  shares  of  stock,  is  apportioned  to  the 
death  of  the  life  tenant.  (Matter  of  Young,  23 
Misc.  (N.  Y.)  223.) 

The  statute  does  not  provide  for  apportionment  of 
income  to  the  date  of  the  death  of  a  testator  who 
creates  the  life  estate  or  the  trust.  (Miller  v.  Craw- 
ford, 26  Abb.  N.  C.  376 ;  Matter  of  FrankUn,  26 
Misc.  107  ;  Matter  of  Weeks,  5  Dem.  194.)  In  cases 
which  do  not  come  within  the  statute  rent  is  not 
apportioned  as  to  time  (Marshall  v.  Moseley,  21  N.  Y. 
280),  nor  are  annuities  except  annuities  for  sup- 
port (Clapp  V.  Astor,  2  Edw.  Ch.  379).  Interest  on 
money  lent  is  apportionable  without  the  aid  of  the 
statute.  (Clapp  v.  Astor,  2  Edw.  Ch.  379  ;  Riggs  v. 
Cragg,  26  Hun,  89, 98.)  Dividends  on  shares  of  stock 
are  not  apportionable.  (Matter  of  Kane,  64  App. 
Div.  566  ;  Hyatt  v.  Allen,  56  N.  Y.  553  ;  Matter  of 
Kernochan,  104  N.  Y.  618  ;  Clapp  v.  Astor,  2  Edw. 
Ch.  379.)  Dividends  declared  before  a  testator's 
death,  but  payable  after,  belong  to  the  principal  of 
the  estate.  (Matter  of  Kernochan,  104  N.  Y.  618 ; 
Hill  V.  Newichawanick  Co.,  8  Hun,  459,  71  N.  Y. 
593.)     Income  derived  from  bonds  and  mortgages 


SUMMAKY   OF  STATUTES  AND  DECISIONS.  87 

and  from  U.  S.,  state,  and  city  bonds  is  apportionable 
as  accruing  from  day  to  day,  without  the  aid  of 
statute.  (U.  S.  Trust  Co.  v.  Tobias,  21  Abb.  N.  C. 
392.) 

North  Carolina.  The  statutes  apportion  "  rents, 
rent  charges,  annuities,  pensions,  dividends,  or  any 
other  payments  of  any  description "  .  .  .  "  made 
payable  at  fixed  periods  to  successive  owners  under 
any  instrument  or  by  any  will  and  where  the  right 
of  any  owner  to  receive  payment  is  terminable  by  a 
death  or  other  uncertain  event."  (Code  of  No.  Car. 
(1883),  §  1748.) 

Ohio.  No  statute.  Eents  are  not  apportionable, 
but  a  life  tenant  is  entitled  to  the  crop  sowed  dur- 
ing her  life  although  her  estate  ceased  before  the 
harvest.     (Noble  v.  Tyler,  61  O.  St.  432.) 

Pennsylvania.  Statute  gives  to  the  executor  or 
administrator  of  a  tenant  for  life,  who  dies  before 
rent  becomes  payable,  an  action  to  recover  from  the 
under-tenant  a  proportion  of  the  rent  according  to  the 
time  elapsed  at  the  death  of  the  tenant  for  life. 
(Brightly's  Purdon's  Digest  Pa.  Stats.  (12th  ed.), 
Vol.I,p.  595,§128.  See  also  p.  584,  §  71.)  Under 
this  statute  a  trustee  would  probably  be  required  to 
apportion  income  in  the  form  of  rent,  at  the  time  of 
the  ceasing  of  one  estate. 

Annuities  are  not  apportionable  except  when  for 
support  or  in  lieu  of  dower.    (Bailey's  Estate,  23  Pa. 


88  INCOME  AND  PRINCIPAL. 

C.  C.  139 ;  Blight  v.  Blight.  51  Pa.  St.  420 ;  Gheen 
V.  Osborn,  17  Serg.  &  E.  171.) 

Ordinary  yearly  dividends  on  shares  of  stock  in  a 
corporation  are  not  apportionable  as  to  time.  (Ross' 
Estate,  2  Kulp,  472.)  The  same  is  true  of  dividends 
or  divisions  of  profits  on  a  partnership  interest 
in  a  business  continued  after  the  testator's  death. 
(McKeen's  Appeal,  42  Pa.  St.  479.) 

Extraordinary  dividends  are  apportioned.  See 
supra,  p.  23. 

Rhode  Island.  Statute  enacts  that  annuities  or 
the  use,  rent,  income,  or  interest  of  property  given 
by  wiU  or  by  an  instrument  in  the  nature  thereof,  to 
or  in  trust  for  the  benefit  of  a  person  for  life  or  until 
the  happening  of  a  contingent  event,  shall  be  appor- 
tioned to  the  time  of  the  death  of  the  life  tenant  or 
the  happening  of  the  contingency.  (General  Laws 
of  R.  I.  (1896),  ch.  203,  §§  38,  39.) 

It  will  be  noticed  that,  like  the  Massachusetts 
statute,  it  does  not  change  the  common-law  rule  at 
the  death  of  a  testator  or  on  a  change  of  investments. 

South  Carolina.  Statute  enacts  that  rent  shall 
be  apportioned  in  favor  of  a  life  tenant  up  to  the 
time  of  his  death.  (Civil  Code  of  S.  C.  (1902), 
Vol.  I,  §§  2408,  2409.)  But  the  common-law  rule 
remains  in  force  as  to  rent  not  due  at  the  time  of  a 
testator's  death :  it  all  goes  to  the  heir  or  devisee. 
(Huff  w.'  Latimer,  33  S.  C.  255.) 


SUMMARY  OF   STATUTES  AND  DECISIONS.         89 

Tennessee.  Statutes  provide  for  apportionment 
of  rent  in  favor  of  a  life  tenant  up  to  the  time  of  his 
death.     (Code  of  Tenn.  (1896),  §  4184.) 

The  common-law  rule  against  apportionment  ap- 
plies as  between  heir  and  administrator  on  the  death 
of  the  owner  in  fee.     (Eowan  v,  Eiley,  6  Bax.  67.) 

Virginia.  The  statute  enacts  that  on  the  deter- 
mination by  death  or  otherwise,  of  the  estate  or 
other  thing,  from  or  in  respect  of  which  any  rent, 
hire,  or  money  coming  due  at  fixed  periods,  issues  or 
is  derived,  or  on  the  death  of  any  person  interested 
therein,  the  personal  representative  or  assignee  of 
the  person  who  would  have  been  entitled  to  such 
rent,  hire,  or  money  when  it  became  due,  but  for 
such  death  or  determination,  shall  have  a  propor- 
tion thereof  according  to  the  proportion  of  the 
time  elapsed.  (Va.  Code,  Annot.  (1904),  §§  2809, 
2810.) 

West  Virginia.  The  code  of  West  Virginia 
(4th  ed.,  1899),  ch.  95,  contains  exactly  the  same 
provisions. 

Wisconsin.  By  statute  rent  is  apportioned  to 
tenant  for  life  up  to  the  date  of  his  death.  (Wis. 
Stats.  (1898),  §  2193.) 


INDEX. 


INDEX. 


A. 

Pages 
ACCUMULATED  INCOME, 

added  to  principal,  when 59 

iutention  of  testator  as  to 59 

in  hands  of  executor  before  trustee  gets  the  estate, 

remains  income 54 

earnings  of,  are  income 54 

ADMINISTRATION, 

expenses  of,  paid  from  principal 69 

ALTERATIONS   AND   ADDITIONS, 

cost  of,  in  trust  property  paid  by  principal  ...  64 

life  tenant  cannot  charge,  to  remainderman     .     .  64 
ANNUITIES, 

definition  of 73 

enjoyment  of,  begins  at  death  of  testator    ...  54 

payable,  when 74 

not  generally  apportioned  by  common  law  ...  73 

for  support,  apportioned 73 

in  lieu  of  dower,  sometimes  apportioned       ...  73 

apportionment  of,  by  statute 74 

APPORTIONMENT, 

of  extraordinary  cash  dividends,  between  income 

and  principal 21-25,  75 

Massachusetts  rule  against 22 

Pennsylvania  rule  in  favor  of 23 

of  stock  dividends. 28-30 


94  INDEX. 

Page 
APPORTIONMENT  —  Continued. 

method  of 29 

of  loss,  between  income  and  principal      .     .     .      50-53 
on  foreclosure  of  mortgage      ....      50-53 

due  to  devastavit 53 

of  profit,  between  income  and  principal   ....       52 

of  current  income  as  to  time 70-89 

important  dates 70-71 

annuities 73-74 

dividends .      74-75 

interest  on  debts  and  loans 77 

mortgage  notes 78 

public  securities 78 

coupon  bonds 70-79 

profits  of  business 76 

rent '    70-72 


B. 

BONDS, 

bought  at  premium,  a  wasting  investment  ...  13 
premium  on,  sometimes  replaced  out  of  interest  13-16 
profit  on  sale  of,  at  increased  premium,  principal  .  16 
interest  on,  apportionment  as  to  time      .     .     .      78-79 

BOTES 7 

BROKERAGE, 

on  changes  of  investment,  payable  from  income    .       68 
on  sale  or  purchase  of  real  estate,  payable  from 
principal 68 


c. 

CAPITAL, 

meaning  of  word 34-35 

fundamental ,    .     .       34 

working 35 

floating ^      35 

See  Principax. 


INDEX.  95 

Pagb 

COMMISSIONS, 

trustee's,  on  collections  of  principal,  payable  from 

income 68 

CORPUS, 

See  Principal. 

COSTS, 

See  Expenses. 

COUPONS  OF  INTEREST  ON  BONDS, 

apportioned  as  to  time  in  some  states      ....      79 
not  apportioned  in  other  states 78-79 


D. 


DIVIDENDS   OF  CORPORATIONS, 

discretion  of  oflBcers  when  to  declare 17 

presumed  to  be  from  earnings 18 

earnings  of  corporation  not  income  of  stockholder 

until  declaration  of  dividend 17 

out  of  fundamental  capital  belong  to  principal       17,  35 
out  of  proceeds  of  capital  not  needed  in  the  busi- 
ness    36 

out  of  proceeds  of  property  taken  by  right  of 

eminent  domain 35 

by  land  companies,  out  of  proceeds  of  property 

sold 38-39 

from  proceeds  of  capitalized  earnings 39 

from  proceeds  of  working  capital 41-45 

from  floating  capital,  are  income 39-41 

in  liquidation  without  separation  of  earnings    .      45-46 
regular  dividends : 

not  apportioned  as  to  time 19,  74,  75 

effect  of  apportionment  statutes 75 

to  depositors  in  saving  banks,  not  apportioned  .  77 
trustees  may  safely  treat,  as  paid  from  earnings  18 
if  wasting  capital,  are  not  wholly  income  .  .  19 
intention  of  creator  of  estate  as  to,  when  wasting      19 


96  INDEX. 

Page 
DIVIDENDS  OF  CORPORATIONS  —  Continued. 

belong  to  owner  of  stock  at  time  declared      .     .       24 
declared  before  death  of  life  tenant,  payable  to 

his  estate 76 

extraordinary  cash  dividends • .      20-25 

not  usually  based  upon  current  earnings  ...       20 
effect  of  payment  of,  on  value  of  stock      .     .      21-22 

double  nature  of 20 

Massachusetts  rule  gives,  to  income     ....      22 
Pennsylvania  rule  apportions,  according  to  time 

of  accumulation 23-24 

criticisms  of  both  rules 24-25 

different  from  delayed  dividends 33 

stock  dividends 25-31 

nature  of 25 

not  distributions  of  tangible  property  .     .     .      26-27 
do  not  increase  value  of  holdings     ....      26-27 
declaration  of,  signifies  capitalization  of  earn- 
ings     28 

Massachusetts  rule  as  to 26-27 

New  York  rule  as  to 30-31 

Pennsylvania  rule  as  to 28-30 

method  of   apportionment  under  Pennsylvania 

rule 29 

option  to  take  either  cash  or  new  stock : 

treated  as  cash  dividend 81 

except  where  option  is  only  apparent  ....       32 
in  form  of  old  shares  in  which  corporation  has  in- 
vested earnings,  similar  to  cash 33,  41 

in  form  of  bonds  issued  by  corporation,  similar  to 

stock  dividend 33 

summary  of  law  as  to  dividends 47-49 

different  from  rights       .........      46-47 

E. 

EARNINGS  OF  CORPORATIONS, 

not  income  of  stockholder  until  declaration  of  divi- 
dend  17,23 


INDEX.  97 

EARNINGS  OF  CORPORATIONS  —  Continued. 

accumulated,  effect  of  on  value  of  stock   ....      20 

interest  of  stockholder  in    ...     .       20 

made  basis  of  new  issue  of  stock,  become  capital         39 

added  to  working  capital,  effect  of      ....      41-45 

See  Dividends  and  Income. 

ENJOYMENT  OF  INCOME, 

begins  when 54 

ESTOVERS 7 

EXPENSES, 

payable  from  income : 

for  maintaining  property 60 

for  management  of  trust  estate  or  life  estate       60,  67 
payable  from  principal : 

of  suit  for  interpretation  of  will 69 

of  bill  for  instructions 69 

of  administration 69 

of  contest  over  wUl 69 

of  defending  estate  from  claims  against  testator       69 
See  Alterations  and  Additions,  Incumbrance, 
Insurance,  Repairs,  Taxes,  Water  Rates. 

F. 

FIREWOOD, 

right  of  life  tenant  to  cut 7 

FORECLOSURE  OF  MORTGAGE, 

loss  on,  apportioned 50-53 

profit  on,       "  52 

expense  of 68 

I. 

INCOME, 

definition  of 1 

distinguished  from  increase .  1,  38 

profit 38 

real,  distinguished  from  apparent 1,  38 

must  not  consume  principal 4 

of  mines,  quarries,  and  oil  wells 5-7 

7 


98  INDEX. 

Paob 

INCOME  —  Continued. 

of  timber  land 7-13 

of  corporation,  distinguished  from  income  of  stock- 
holder      17 

interest  of  stockholder  in     .     .     .      20 
accumulated,    effect   on  value   of 

stock 20 

double  nature  of  .     .       20 
of  corporation,  discretion  of  directors  as  to  dispo- 
sition of 25 

accumulated,  stockholder  has  equi- 
table rights  in 28 

does  not  include  increase  in  value  of  stock  due  to 

proximity  of  dividend 77 

accumulated  in  hands  of  executor,  remains  income      54 
in  excess  of  what  trustee  is  directed  to  pay  out, 

becomes  principal 59 

temporarily  withheld  from  beneficiary,  remains  in- 
come   59 

enjoyment  of,  begins  when 54-59 

equitable,  in  case  of  delayed  conversion  ....       55 

how  determined 56-57 

from  shipping 57 

partnership 57 

leasehold 57 

vacant  land 57 

when  testator  presumed  to  mean  equitable  ...       58 

charges  against 60-68 

expenses  of  management 60,  67 

ordinary  taxes 60 

water  rates 60 

taxes  for  lasting  improvements,  when  ....       62 

ordinary  repairs 64 

insurance 66 

interest  on  incumbrances 66-67 

trustee's  charges  for  services 67 

brokerage  on  changes  of  investments,  except 

purchase  or  sale  of  real  estate 68 

trustee's  commissions  for  collecting  principal     .       68 


INDEX.  99 

Page 
INCOME  —  Continued. 

apportionment  of,  see  Apportionment  .     .     .      70-89 
See  Dividends. 
INCREASE, 

in  value  of  principal,  belongs  to  principal     ...        2 

distinguished  from  income 1,  38 

of  premiums  on  bonds  belongs  to  principal  .     .      13,  16 
INCUMBRANCES, 

interest  on,  payable  from  income  of  trust     ...       67 

by  life  tenant 67 

principal  of,  payable  from  principal  of  trust     .     .       67 
when  paid  by  remainderman    ...       67 
INHERITANCE  TAX, 

payable  from  estate  or  interest  taxed      ....      63 
INSURANCE, 

life  tenant  not  obliged  to  take  out 66 

expense  of,  charged  to  income  of  trust    ....       66 

money  belongs  to  principal 66 

INTEREST, 

on  incumbrances,  payable  from  income  of  trust     66,  67 

by  life  tenant       .     .      66,  67 

dividends  to  depositors  in  savings  banks  are  not  77 

apportionment  of 77-79 

INVESTMENTS, 

expense  of  making,  payable  from  income      ...      67 
changing,     "  "  "      ....      68 

For  Wasting  Investments  see  Table  of  Contents. 


L. 

LEASEHOLD  ESTATES, 

are  wasting  investments 5 

rent  of,  belongs  partly  to  principal 5 

equitable  income  of 57 

LIFE  TENANT, 

must  distinguish  carefully  between  income  and 
principal 3 


100  INDEX. 

Paob 

LIFE  TEJH ANT— Continued. 

must  repair  waste  of  principal 4 

must  pay  ordinary  taxes 60 

must  keep  property  in  repair 64 

cannot  charge  improvements  to  remainderman      .  64 

not  bound  to  insure 66 

must  pay  interest  on  incumbrances      ....      66-67 
right  of,  to  dividends.     See  Dividends. 
income  of.    See  Income,  Apportionment,  Wast- 
ing Investments. 
LOSS, 

of  income,  not  made  up  out  of  principal      ...  50 

of  principal,  not  made  up  out  of  income  ....  50 
on  foreclosure  of  mortgage,  apportioned  .     .     .      50-51 

on  devastavit,  apportioned 53 


M. 

MANAGEMENT  OF  TRUST  PROPERTY, 

expense  of,  payable  from  current  income      ...  67 

MERGERS, 

dividends  in  cases  of 36-38 

MINES,  QUARRIES,  OIL  WELLS, 

are  wasting  investments 5 

product  of,  not  real  income 5 

rent  or  royalties  of,  how  disposed  of 5 

"  open  "  mines,  what  are 5 

"  open  "  mines,  product  of ,  given  to  income      .     .  5-7 

intention  of  creator  of  estate  as  to .6 


o. 

OIL  WELLS, 

wasting  investments 

See  Mines. 
OUTLAY, 

See  Table  of  Contents. 


INDEX.  101 

P. 

PREMIUM,  ON  BONDS, 

how  paid 13 

sinking  fund  to  replace  loss  of 13-15 

increase  of,  belongs  to  principal 13,  16 

PRINCIPAL, 

definition  of 1,  2 

income  must  not  consume 4 

mere  decrease  in  value  of,  not  to  be  made  up 

out  of  income 4 

rent  from  leasehold  estates  belongs  partly  to  .  .  5 
product  of  mines,  quarries,  and  oU  wells,  when 

belongs  to        5-7 

rent  or  royalties  from  mines,  quarries,  and  oil  wells, 

when  belongs  to 5-7 

timber,  when  belongs  to 7-13 

premiums  paid  from,  on  bonds  should  be  replaced 

when 13 

sinking  fund  to  replace  premiums  belongs  to,  as 

fast  as  accumulated 13 

profit  realized  on  sale  of  bonds  belongs  to  .  .  .  16 
dividends.     See  Dividends. 

loss  of,  not  to  be  made  up  from  income  ....  50 
loss  on  foreclosure  of  mortgage  apportioned  .  51-52 
profit  on  foreclosure  of  mortgage  apportioned  .     .       52 

loss  on  devastavit  apportioned 53 

excess  of  real  income  over  equitable,  belongs  to  .  55 
accumulated  income  not  otherwise  disposed  of 

belongs  to 59 

chargeable  with  taxes  assessed  before  beginning 

of  trust  or  life  estate      .       61 
for    permanent     improve- 

'  ments 62 

equitable  part  of  taxes  for  last- 
ing improvements     ....       62 
tax    upon    unproductive    prop- 
erty    63 


102  INDEX. 

Paob 
PRINCIPAL  —  Continued. 

chargeable  with  inheritance  tax  upon  interest  of 

remainderman 63-64 

alterations  and  additions    ...       64 
repairs  on  newly  purchased  prop- 
erty    . 65 

extensive    repairs    on    property 
which  trustees  have  power  to 

seU 65 

expense  of  permanent  improve- 
ments   65 

principal   of  incumbrance      .     .       67 
brokerage  on  sale  or  purchase  of 

real  estate 68 

costs  and  expense  of  suit  for  in- 

tei-pretation  of  will  or  trust  .  69 
expense  of  administration  .  .  69 
expense  of  suits  against  estate  of 

testator 69 

expense  of  suits  contesting  will   .      69 
PRODUCTS, 

of  soil,  are  ordinarily  income 7 

of  woodland.     See  Timber. 

of  mines,  quarries,  and  oil  wells,  are  not  real  in- 
come     5-7 

PROFITS, 

not  synonymous  with  income 1,  38 

on  sale  of  bonds,  belong  to  principal 16 

on  sale  or  exchange  of  stocks,  belong  to  prin- 
cipal       36-38 

on  foreclosure  of  mortgage,  apportioned       ...       52 
of  business,  not  apportioned  between  days  of  ac- 
counting      76 

of  business,  in  case   of  delayed  conversion,  not 

always  given  to  income      . 56 

See  Income  and  Increase. 


INDEX.  103 

Q. 

Page 
QUARRIES, 

wasting  investments 5 

See  Mines. 

E. 

RENT, 

of  leasehold  property,  not  wholly  income  ...  5 
of  mines,  quarries,  and  oil  wells,  not  income  .  .  5-7 
not  apportioned  as  to  time  by  common  law  .  .  70-71 
apportionment  of,  by  statutes 71-72 

REPAIRS, 

ordinary,  must  be  made  by  life  tenant    ....       64 
charged  to  income  of  trust  estate  ...       64 
in  nature  of  additions  and  alterations,  charged  to 

principal 64 

on  newly  purchased  property,  charged  to  principal  65 
extensive,  at  beginning  of  trust  estate     ....       65 

RIGHTS, 

are  not  dividends .      46-47 

belong  to  principal 46 

ROYALTIES, 

from  mines,  quarries,  and  oil  wells  are  not  income     5-7 


S. 
SAVINGS  BANKS, 

dividends  of,  to  depositors  not  apportioned    .     .      77 

T. 

TAXES, 

ordinary,  payable  from  income  of  trust  estate      .       60 

by  life  tenant 60 

not  apportioned  as  to  time 61 

assessed  before  death  of  testator,  are  debt  of  estate      61 
for  permanent  improvements,  payable  from  prin- 
cipal of  trust 62 


104  INDEX. 

Paob 

TAXES  —  Continued. 

for  permanent  improvements,  apportioned  between 

life  tenant  and  remainderman 61 

for  lasting  improvements,  apportioned     .     .     .      62-63 
upon  unproductive  property,  payable  from  principal      63 
inheritance,  payable  from  estate  taxed     ....       63 
TIMBER, 

not  wholly  income  of  life  tenant 2,  7 

right  of  life  tenant  to  cut,  for  firewood  and  repair 

of  fences  or  buildings 7 

English  law  as  to  cutting  for  profit 8-9 

American  law  as  to  cutting  for  profit    ....  9-13 

proceeds  of,  when  blown  down 11 

TREES.     See  Timber. 
TRUSTEE, 

duty  of,  to  distinguish  between  real  income  and 

principal 1,  3 

duty  of,  to  prevent  waste  of  principal  by  apparent 

income 4 

duty  of,  to  provide  for  repairs  out  of  woodland      .        7 
charges  for  services  of,  payable  from  income    .     .       67 
See  Incomk  and  Principal. 

U. 

UNPRODUCTIVE  PROPERTY, 

equitable  income  of,  when  conversion  delayed  .     .       55 
taxes  upon,  payable  from  principal 63 

W. 

WATER  RATES, 

life  tenant  must  pay 60 

payable  from  income  of  trust  estate 60 

WASTING  INVESTMENTS 4-16 

See  Table  of  Contents. 
WOOD  AND  WOODLAND. 

See  Timber. 


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